The Multiplier Process

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The multiplier effect cannot be seen in one shot, but rather takes months to occur in the system. As per the example, we can look upon the process of multiplier. There is an increase of 0.5 trillion dollars in autonomous expenditure as well as real GDP which is known as a green bar of round 1. Round 2 illustrates that real GDP is increasing the induced expenditure too. Since the curve AE slope is 0.75, the induced expenditure is also increased by 0.75 times which means that real GDP is also increased by 0.75 times which in turn increases the induces expenditure by 0.375 trillion dollars.

So when you add the changed induced expenditure (green bar-round 2) with the earlier expenditure increase (blue bar-round 2), we can say that the real GDP is increased by 0.857 trillion dollars. The process continues when increase in real GDP in round 2 affects the increase the induced expenditure in round 3 and so on. As a result, the real GDP will increase by two trillion dollars eventually.

 

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