Ask Question
18 March, 21:32

Suppose that out of the original 100 increase in government spending, 33 will be recycled back into purchases of domestically produced goods and services in the second round and 10.89 is spent in the third round. Following this multiplier effect, what value would be recycled in the fourth round of this cycle?

+1
Answers (1)
  1. 19 March, 01:06
    0
    Multiplier effect in the 4th round = 3.58

    Explanation:

    A change in aggregate demand can create a much greater impact in the equilibrium national income. This is known as the multiplier effect. This occurs when injections of new demand for goods and services into the circular flow of income creates further rounds of spending. For example, if the government spending was on building new affordable houses then the need for housing materials will create demand for wood, cement and other housing supplies. Thus, these businesses will see a rise in sales. Whilst they benefit through profits, their employees would benefit from wages and salaries. As their income rises, they will spend it in the economy, and so will the businesses from their profits. This additional rounds of spending is the multiplier effect.

    If a 100 increase creates 33 for the second round, it is 33% (33/100 x 100) i. e. 100 x 33% = 33

    This is proven since 33 x 33% = 10.89 in the third round.

    Hence, the multiplier effect in the forth round = 10.89 x 33% = 3.58
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Suppose that out of the original 100 increase in government spending, 33 will be recycled back into purchases of domestically produced ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers