The multiplier effect

Question

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The multiplier effect refers to the idea that an initial increase in spending can lead to a larger increase in aggregate demand and real GDP. This is because the increased spending creates a ripple effect throughout the economy, as those who receive the increased income subsequently spend some of it themselves, creating further rounds of spending and income generation. Therefore, small changes in spending can be magnified into larger changes in real GDP, as measured by the multiplier.

The Multiplier Effect