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Use the multiplier to explain how an increase in any component of aggregate demand will increase GDP. What are the practical problems in trying to determine the exact size of a multiplier effect?
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Use the multiplier to explain how an increase in any component of aggregate demand will increase GDP. What are the practical problems in trying to determine the exact size of a multiplier effect? Under what circumstances will a positive multiplier effect not be advantageous for an economy? Any time new spending is introduced into or removed from an economy, it will cause GDP to change by some multiple of the spending shock. This takes place through the multiplier process in aggregate spending largely through changes in consumption expenditure. Therefore the principle of the multiplier is that a change in the level of injections of leakages brings about a relatively greater change in the level of national income. The level of change depends greatly on consumers' marginal propensity to consume (MPC)- how much additional income will they spend or save-, the larger the MPC is, the larger the multiplier effect and so...
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