Answer to Question #140235 in Macroeconomics for Moises

Question

Explain the multiplier intuitively. Why is it that an increase in planned
investment of 100 pesos raises equilibrium output by more than 100
pesos?

Answer 1

The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. ... The money supply multiplier is also another variation of a standard multiplier, using a money multiplier to analyze effects on the money supply.

The value of the multiplier depends upon the percentage of extra money that is spent on the domestic economy. If people spend a high % of any extra income (a high mpc), then there will be a big multiplier effect. However, if any extra money is withdrawn from the circular flow the multiplier effect will be very small.