The multiplier effect occurs when a million dollars, for example, of expenditure generates more than a million dollars worth of income for the rest of the population. You might be wondering, how does this happen?
Take for example a rich man who spends a million dollars on a new Lamborghini. This one million dollars is of revenue to Lamborghini is paid to its employees in salaries. Each worker, say we’re only talking about the production workers, gets paid about $2000. Then each worker takes his $2000 and they go out to have a good time together at a club. The bar tender then gets paid for his service, maybe about $3000 a month, he’s an awesome bar tender. Then this bar tender decides to have a big feast with his family, so he takes his family to a restaurant and pays $1000 for a freakin big and good meal! So the chef gets paid.
This story can go on and on but it finally stops when the initial 1 million dollars spent by the rich man has seen its limit to this multiplication effect. To summarize, every one dollar spent generates more than one dollar of income. And how much income is generated out of this dollar spent is determined by the economy’s multiplier. You will learn that factors such as the marginal propensity to consume as well as proportional taxes affect the multiplier of the economy.
At the end of this video, you should be able to:
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