1. The Multiplier EffectChanges in Aggregate Demand are likely
to have more than one effect. This is dueto the Circular Flow of
Income in which money is circulated around the
economy.ConsumersProducersIn the simple diagram above the money
that Consumers spend on products fromproducers, is the producers
income as well as being consumer expenditure. This isalso true for
the bottom arrow, which indicates the consumers income but also
theproducers expenditure.The multiplier effect explains what
happens with an increase in AggregateDemand. If for example
consumer spending rises, this indicates that consumers arebuying
more, which increases the demand for a businesss products. This
causesthe business to purchase capital goods (investment) in order
to cope with theexcess demand. In addition to this the companies
would have to raise the wagerate to cope with the extra demand,
which then increases government revenueand consumer spending.This
is known as the multiplier effect.Aquinas Economics
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