Explain the theory of multiplier
Can You Explain The Basic Multiplier Model And What Is Its Key Assumption?
When economists attempt to understand why major increases in wartime military spending lead to rapid increases in gross domestic product, or why the tax cuts of the 1960s or 1980s ushered in long periods of business cycle expansions, they often turn to the multiplier model for the simplest explanation.
What exactly is the multiplier model? This is a macroeconomic theory used to explain how output is determined in the short run. The name multiplier comes from the finding that each dollar change in certain expenditures leads to more than a dollar change in gross domestic product. The multiplier model explains how shocks to investment, foreign trade, and government tax and spending policies can affect output and employment in an economy with unemployed resources.
The key assumption in the multiplier analysis is that prices and wages are fixed in the short run, because they are fixed, all the adjustments to shocks or economic policies come through output and employment. The helpful assumption of fixed wages and prices is an oversimplification because these variables definitely do react to short run business conditions.
What exactly is the multiplier model? This is a macroeconomic theory used to explain how output is determined in the short run. The name multiplier comes from the finding that each dollar change in certain expenditures leads to more than a dollar change in gross domestic product. The multiplier model explains how shocks to investment, foreign trade, and government tax and spending policies can affect output and employment in an economy with unemployed resources.
The key assumption in the multiplier analysis is that prices and wages are fixed in the short run, because they are fixed, all the adjustments to shocks or economic policies come through output and employment. The helpful assumption of fixed wages and prices is an oversimplification because these variables definitely do react to short run business conditions.
The basic multiplier model is actually a macroeconomic theory. It is used to explain how output is determined in the short run. It has certain assumptions such as the prices and wages are fixed in the short run, the adjustments to shocks come through output. You can find information in detail on this topic at this great link from Blurtit itself:
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