The Multiplier Effect

The Multiplier Effect

The fiscal multiplier effect occurs when an initial injection into the economy causes a bigger final increase in national income.... For example: if the government increased spending by £1 billion, there would be an initial increase in aggregate demand of £1 billion. However, if this injection eventually caused real GDP to increase by £2 billion, then the mulitplier would have a value of 2.0.

Multiplier (k) = Change in real GDP (Y)

                        Change in injections

Example of how the multiplier effect works:

• If the government spent an extra £2 billion on the NHS, this would cause salaries / wage to increase by £2 billion, therefore…