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What is the multiplier effect?

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What is the multiplier effect?

Our expenditures are always greater than what our actual dollar value is. How does that work? Is this related?

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An increase in expenditures will increase demand and lower inventories which will cause producers to increase output. This increased output translates into increased disposable income for the workers and suppliers of the producers, which will spur consumption. This further increases ...

Solution Summary

This Solution addresses how it is possible for demand to increase by more than the initial expenditure; constraints on the multiplier effect.

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Aggregate Demand, Multiplier Effect, and Fiscal Policy

1. Describe the factors that cause the aggregate demand (AD) curve to shift and the factors that cause the short run aggregate supply (SAS) curve to shift. Explain how each factor described above works in shifting the AD and SAS curves.

2. Explain the difference between expansionary and contractionary fiscal policy and describe how each policy affects aggregate demand, aggregate expenditures, output and income.

3. Explain how the multiplier effect would support Keynes' explanation how economies can fall into recession or depressions.

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