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Essay / Research Paper Abstract
The multiplier effect is a well known economic model. This 4 page paper explains, in simple terms, what the multiplier process is and how it works, including an easy to understand example. The paper also explains why it works and also considers what factors may hinder the multiplier process. The bibliography cites 1 source.
Page Count:
4 pages (~225 words per page)
File: TS14_TEmultiply.rtf
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Unformatted sample text from the term paper:
aggregate demand, where spending drops a recession may occur. These may be argued to be part of the multiplier process. To understand why this occurs, we first have to understand
what is meant by the multiplier process. As the name suggests the multiplier process is a chain reaction by which initial trends will create exaggerated trend within an economy
as a result of the pattern of consumption. The best way of explaining this is to give a demonstration. The multiplier process is subject to a simple equation; k=1/(1-MPC, here
k is the multiplier effect and MPC is the marginal propensity to consume (Nellis and Parker, 1996). To define the term consume, in an economy this may be equated
with spending money or making purchases, the opposite of consumption is for money to be lost to the economy, such as with savings or with tax, as well as money
leaving the country. However, we will come to this in more detail later. Where there is a marginal propensity to consume this will be expressed as a numerical value
out of 1, in the example we use the marginal rate of consumption of 0.75 means that three quarters of income generated will be spent.
Looking at this also starts to explain some of the basics of why the multiplier process occurs. If a business buy machinery for 80,000, this will put
80,000 in the hands of the supplier. The supplier will then need to replace the stock, and as such with a MCP they will spend 60,000 on new stock from
the manufacturer. When they make the purchase from the manufacturer the manufacturer will need to make new stock to sell, and as such will spend some of the income on
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