Economic Activity & The Multiplier Effect

  • Economic activity can mean many things but in this case we'll think of it as centring on the production & consumption of goods & services in the economy, together with the employment of the labour, capital & other inputs that produce output.
  • Any changes to the components of aggregate demand will lead to a shift in the AD curve. This will affect the equilibrium level of national income & lead to a change in economic activities.
  • If there is an increase in AD then there will be increased consumption, output/production, use of FoP, employment & a decrease in unemployment.
  • The main link between employment & AD is simple: When real output increases, firms generally have to employ more workers to produce the additional goods & services that the output increase involves.
  • If there is a reduction in AD then there will be decreased consumption, ouput/production, use of FoP, employment & an increase in unemployment.

Multiplier = The relationship between a change in aggregate demand & the resulting, usually larger, change in national income.

If gvnmt spending increases by £10 billion but tax revenue remains unchanged, then the resulting budget deficit initially injects £10…


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