Using A Numerical Example Of The Income Multiplier Process

Using a numerical example explain the income multiplier process. When extra spending is injected into the economy, it will create further spending which will also create further spending and so on. If firms decide to hire more people, then there is more income being paid to households. Households will then spend this money on domestic goods. This further increase in consumption will act as an incentive to firms to supply more to meet the growing demand, and henceforth further employ more people leading to another increase in household income. Thus consumption increases and the process continues. For example, if  £10million is injected into the economy, if the multiplier was 3, it would cause a  £30million rise in national income. What is meant by automatic stabilizers and show how they work? Automatic stabilizers are components of the government spending which are not at the discretion of the government. For example, In an economic downturn with lower household income due to rising unemployment, tax receipts automatically fall, and government expenditures automatically rise via expenditure on benefits. The increase in government spending offsets the lower consumption spending of the households and lower investments of companies in the economic downturn. By offsetting the decrease of consumption and investments, the automatic increase in government expenditures lessens the impact of a recession on the total GDP. 3. Given: C = 400 + 0.5Y I = 500Show MoreRelatedUnit 38 Business and Economic Environment4792 Words   |  20 Pagesa significant impact on business as it is such a high proportion of the gross domestic product. Spending on infrastructure projects such as upgrading the west coast main railway line or building new sports facilities for the Olympic Games have a multiplier effect at both the national and local level. Suppliers of related goods and services prosper. 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