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2.4.4 THE MULTIPLIER, image, image, image - Coggle Diagram
2.4.4 THE MULTIPLIER
MULTIPLIER:
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For example GOV spends 100 million on NHS pay rise.
The NHS workers get this extra income that they then spend depending on their MPC.
They may spend this extra income in supermarkets or shops which will lead to higher wages for the supermarket (transmission mechanism). This becomes expenditure in the supermarkets which is income for the supermarket.
This turns into expenditure for extra
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NEGATIVES OF MULTIPLIER
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Not beneficial in the long term as in the classical LRAS curve it would only increase the price level and not increase output.
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Negative multiplier.
The final fall in GDP is higher than the original injection that brought it about.
Eg the government cut 3,000 jobs in the public sector. This means they spend less so a fall in revenue in local restaurants.
As the restaurants are making less revenue they make some staff redundant.
This makes this staff less likely to spend on gyms.
This shows that the final change in GDP is less than the withdrawal that brought it about.
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