a. Please explain the concept of the multiplier, including What information is required to calculate the spending multiplierb. List and explain the 3 different multipliers that we discussed.c. Explain in detail how the multiplier works to impact GDP. Be specific! Start with the injection of money into the economy and then how that affects household income and then spending via the mpc. Go on to discuss the rounds of spending, etc. and how the ultimate impact on gdp is amplified by the multiplier effect.

Question
Asked Nov 6, 2019
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a. Please explain the concept of the multiplier, including What information is required to calculate the spending multiplier

b. List and explain the 3 different multipliers that we discussed.

c. Explain in detail how the multiplier works to impact GDP. Be specific! Start with the injection of money into the economy and then how that affects household income and then spending via the mpc. Go on to discuss the rounds of spending, etc. and how the ultimate impact on gdp is amplified by the multiplier effect. 

 

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Expert Answer

Step 1

(a) Multiplier is a measure that tells the effect of change in any economic variable on the GDP of the economy. In other words, it tells the amount of change in GDP due to change in an economic variable. Spending multiplier is defined as 1/MPS where MPS is the ratio of additional income save by the individuals in the economy. Hence the MPS or MPC that is ratio defining amount of additional income consumed by the individual is required for calculating spending multiplier.

Step 2

(b) Three different types of multiplier are listed below.

  • Employment multiplier: as the rem defines, the employment multiplier captures the effect of public investment and expenditure on the amount of employment. If the value of the employment multiplier is 2 then it represents that a specific amount of public investment doubles the employment level in the economy.
  • Price multiplier: Income and investment multiplier will operate until the point when the economy does not reach to the full employment level. Once the economy reaches to full employment level any change in...

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