Discussion:
The following examples relate to the multiplier effect.
In each of the following situations determine the direction and size of the change in total output and income that will result from each change in nonincome-determined spending.
1. After several years of drought, farmers in central Illinois spend $50 million on irrigation equipment at a time when households do not spend 25% of additional income they receive.
Change in GDP is $200 million (=4 x $50)
2. The federal government cuts spending on the purchase of new goods and services by $35 billion at a time when households are not spending 40% of additional income they receive.
3. Developers borrow $120 million for new home construction in a suburb of Denver at a time when households are spending 70% of additional income received.
4. Business spending for machinery and equipment falls by $6 billion after predictions of a recession. Households spend only 50% of additional income they receive, due to the predictions.
5. Imports increase by $25 million at the same time exports increase by $20 Million. Households spend 60% of additional income received.