Answer Summary:

The Multiplier Effect is a process in macroeconomics where an increase in spending leads to a greater increase in total national income, and is used to explain how an economy can grow. This answer will explain the Multiplier Effect, and provide a step-by-step explanation of how to calculate the first three steps of the Multiplier Effect when the Marginal Propensity to Consume (MPC) is 0.75 and an original French tourist’s expenditure in this economy was $250.

Supporting Subsections:

What is the Multiplier Effect?

The Multiplier Effect is a process in macroeconomics where an increase in spending leads to a greater increase in total national income. This process occurs because when an individual spends money, it results in an increase in income for the seller of the product or service. This extra income is then spent by the seller. This then creates an additional increase in income for the seller of the product or service they purchased. This creates a chain reaction of spending and income which can lead to an overall increase in national income.

Calculating the Multiplier Effect

To calculate the Multiplier Effect, you need to know the Marginal Propensity to Consume (MPC). This is the fraction of every additional dollar that is spent on consumption. In this example, the MPC is 0.75.

You then need to know the original expenditure, which in this case is $250.

Step-by-Step Calculation

The first step is to calculate the initial change in income, which is equal to the original expenditure multiplied by the MPC. In this case, this is equal to $250 x 0.75 = $187.50.

The second step is to calculate the secondary change in income, which is equal to the initial change in income multiplied by the MPC. In this case, this is equal to $187.50 x 0.75 = $140.63.

The third step is to calculate the tertiary change in income, which is equal to the secondary change in income multiplied by the MPC. In this case, this is equal to $140.63 x 0.75 = $105.47.

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