[This is part of the series: The Complete Guide To Economics 101.]
What is the multiplier effect?
The Multiplier Effect is the impact that initial changes in spending will have in the economy.
For instance, an initial decrease in price levels is multiplied from its original impact.
- Price levels decrease at home
- So people buy more goods and services – because our money goes further
- Home firms increase output in response to increased demand
- This also makes goods here cheaper for foreigners
- So foreigners buy more goods from us
- Home firms AGAIN increase output in response to increased demand
This “AGAIN” response is the multiplier effect.