The multiplier help (1 Viewer)

[SGSII]

Hi guys
Would someone please help explain:
How does the multiplier process increase national income? (worth 2 marks)
Thanks

 

[JFX]

Hi guys
Would someone please help explain:
How does the multiplier process increase national income? (worth 2 marks)
Thanks

The multiplier process occurs because an initial injection causes a new wave of spending. This injection causes extra money to flow throughout the economy and this leads to a rise in consumption, increasing aggregrate demand. As a result, national income increases.

For example, if the government increases spending on building new infrastructure, there is a flow-on effect. Firms receive the funds which can be used to purchase factors of production, such as labour who also receives more money from firms to be used to consume or save. This injection flows throughout the economy, stimulating aggregate demand, hence, increasing the national income.

 

[SGSII]

Thanks!