multiplier effect analysis

Question 1

analysis of multiplier graph

Answer 1

1. An increase in government spending represents an increase in injection into a circle of income
2. it’s leads to a rightward shift in aggregate demand (AD1-AD2)
3. This is because government spending is a component of aggregate demand
4. as a result, real GDP increases Y1-Y2
5. Furthermore, there is likely to be a further increase in aggregate demand AD2-AD3
6. And a further rise in real GDP Y2-Y3
7. Due to a positive multiplier effect

Question 2

Negative multiplier effect

Answer 2

• the fall in AD from AD1-AD2 could lead to a negative multiplier effect

– Decrease in aggregate demand could lead to a greater final fall in real GDP

– This is shown by the fall in at the demand from AD2-Ad3

– For every £1 decrease in AD COULD LEAD TO A £2 DECREASE IN REAL GDP

– this can lead to an increase in unemployment

– Fall in economic growth from Y1-Y2

– Fall in demand, pull inflation pl1-pl2

– Possible increase in balance of payments, if less income is spent on imports