Multiplier Effect
The multiplier effect refers to the way an initial investment or spending can lead to a larger overall increase in economic activity. For example, when a government spends money on building a road, construction workers earn wages, which they then spend on goods and services. This spending creates income for others, who also spend, creating a ripple effect throughout the economy. Essentially, the initial spending multiplies through various rounds of expenditure, resulting in a greater overall impact on economic growth than the original amount spent.
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The multiplier effect refers to the phenomenon where an initial increase in spending leads to a more significant overall increase in economic activity. For example, when the government invests in building a new road, the workers hired spend their wages on goods and services, boosting demand in local businesses. As these businesses grow, they may hire more employees, further increasing spending in the community. This cycle continues, amplifying the initial investment's impact across the economy, resulting in greater total growth than the original amount spent.