Economics Aggregate Demand And Supply Questions
The multiplier effect refers to the phenomenon where an initial change in spending or investment leads to a larger overall impact on aggregate demand. When there is an increase in spending or investment, it stimulates economic activity and leads to an increase in income and consumption. This increase in consumption further stimulates demand, leading to more income and consumption, and so on. As a result, the multiplier effect amplifies the initial change in spending or investment, causing a larger overall impact on aggregate demand. Conversely, a decrease in spending or investment can also have a negative multiplier effect, leading to a decrease in aggregate demand.