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    Multiplier effect on economy

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    Does anybody want to illustrate Monetary Policy using the following example:
    Let's say the Fed Reserve decreases interest rates by 5% (which they did recently over a period of 2 years). Manufacturers who used to offer 4% financing now are willing to do it for 0%. This causes aggregate demand for cars to increase by 100 Million, let's say over the current Quarter of this year. Demand goes up 100M during the Qtr, what happens to production (assuming inventories are staying at the same level)? In other words, how does it affect GDP = CGIX? Then, remembering that Aggregate Expenditures (CGIX) = Aggregate Income (sum of factor payments), what happens to Aggregate Income over the same Qtr? And then what happens to Aggregate Exp and Aggregate Income in future quarters? Calculate the impact on GDP caused by a decrease in interest rates. Use MPC = 80%.

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    Solution Preview

    Reduction in Interest will lead to increase in aggregate demand by 100 mn will leads to increase in production by 100 mn as inventories are assumed to be same. which leads to increase in aggregate
    expenditure by 100m during current ...

    Solution Summary

    This explains the concept of multiplier effect on economy