Question

The idea that the eventual decline in spending will be much larger than the initial (autonomous) decrease in aggregate demand is the ______.

Answer 1

The blank is to be filled with the word Multiplier.

The Multiplier effect refers to the effect on national income and product of an exogenous(caused by a variety of factors outside the control of a single organization) increase in demand.

In other words, it means that the multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal of capital.

Let's take an example. Suppose assume a company makes a $100,000 decline in investment of capital to expand its manufacturing facilities in order to produce less and sell less. After a year of production with the new facilities operating at minimum capacity, the company’s income decreased by $200,000. This means that the multiplier effect was 2 ($200,000 / $100,000). Simply put, every $1 of disinvestment produced an extra decline in $2 of income.

Hence, The idea that the eventual decline in spending will be much larger than the initial (autonomous) decrease in aggregate demand is the Multiplier.

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