Rehman Mahmood

The Multiplier Effect

Question 3

The multiplier effect describes how an increase in some economic activity starts a chain
reaction that generates more activity than the original increase. This is an example of a
demand management approach, which is an approach which seeks to increase aggregate
demand. In the town of Bo’ness, ING real estate has decided to invest by producing a £150
million scheme. By doing this there will be new hotels, apartments and homes in the town.
Not only will this increase the town’s population but it will also increase tourism. This will
have a positive effect on all local business. This is an example of the multiplier effect at
work, the £150 million pound investment creates homes and apartments, which creates
tourism, which increase the number of consumers in the town and benefits all local
businesses. As a result of this, the incomes of many people will rise. It is very difficult to
measure the multiplier effect because an investment of this size can make many different
changes to the economy which will be difficult to measure and the results may be
inaccurate.

4)

Income tax is the tax added to workers wages. Income tax falls and as a result of this
consumers have more disposable income. Employment will also rise to produce more and
cope with the extra demand.
Rehman Mahmood

Figure 11

The SRAS moves because of the large rise in prices which encourage suppliers to produce
more.