Define Multiplier Effect.

The multiplier effect is an economic concept that refers to the proportional increase in final income or output resulting from an injection of new spending or investment into the economy. When there is an initial increase in spending (such as government expenditure, investment by firms, or exports), this spending creates a chain reaction of additional spending.

For example, if the government invests in infrastructure projects, it stimulates economic activity by providing contracts to construction companies. These companies, in turn, hire workers and purchase materials, leading to increased incomes for workers and suppliers. The workers and suppliers then spend their additional income on goods and services, further boosting demand in the economy.

The multiplier effect demonstrates how an initial injection of spending can generate larger increases in national income and output through successive rounds of spending. It highlights the interconnectedness of different sectors in the economy and underscores the importance of fiscal and monetary policies in stimulating economic growth and employment.