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The multiplier (Determinants for the multiplier (. (Propensity to import,…
The multiplier
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What is the multiplier
The multiplier is describing that when there is an initial change in aggregate demand their is a knock on effect that gets bigger and bigger in value over time
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When built the people buying them will be able to get out of council housing and the government has to spend less on befits
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Example using numbers
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a £300 million increase in capital investment created when an overseas company builds a new production plant in the UK
This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods and construction businesses build the new factory will see an increase in their profits
If they and their employees in turn, collectively spend about 3/5 of that additional income, then £180m will be added to the incomes of others.
At this point, total income has grown by (£300m + (0.6 x £300m).
This will then carry on as the producers see a 60% increase in their income they will want to use that extra profit to produce more goods
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