In the figure above we have clearly seen that the rise in the autonomous expenditure has caused the equilibrium to go up by a significant range. This has led the value of the multiplier to be concluded as more than 1. But the question is why does this happen? What is the explanation for this rise? The explanation is quite basic. Equilibrium expenses rise as the induced expenses undergo a hike. With this hike in the range it automatically leads to the increase in expenditure. The expenses are escalating at a high rate, for example when a government takes up an educational policy and invests $10 billion on it, the amount gets added to the real GDP, in addition there are costs for construction of schools, institutions, hiring teachers. To add to these amounts there is a portion of cost which is invested in consumption of varying goods and services like technology, books, etc. Now this increase in the additional costs and expenses leads to the multiplier effect. The real question is how deep is the effect?
Links of Previous Main Topic:-
Links of Next Macroeconomics Topics:-