Can you explain the multiplier effect?

The most simple definition of the multiplier effect is an initial injection in to the circular flow of income, that results in a larger final increase in real GDP. This process is a result of additional rounds of spending, and can be shown by changes to the Aggregate Demand curve.
An injection can be in the form of Government Expenditure, Exports and Investment.
An explanation of the multiplier effect can start from the Government deciding to build a motorway. And this can be related to each outward expansion of the AD curve. One must also remember that you can have both positive and negative multiplier effects.

JB
Answered by James B. Economics tutor

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