Multiplier effect
Definition. The multiplier effect is the process by which an initial change in an injection into the circular flow of income, such as investment or government spending, leads to a larger eventual change in national income, because the initial spending is received as income and re spent in successive rounds.
The multiplier equals one divided by the marginal propensity to withdraw. A larger value occurs when households re spend a greater share of each round of income within the domestic economy.
This term belongs to The Circular Flow of Income in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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