ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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There is a time lag
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it increases government intervention
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it increases protectionism
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It causes a decrease in aggregate supply
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Detailed explanation-1: -The multiplier takes into account only the effects of induced consumption on income; it neglects the repercussions of induced consumption on induced investment. It fails to see the typical relationship between the demand for capital goods and consumption goods, and that the demand for capital goods is a derived demand.
Detailed explanation-2: -In terms of gross domestic product, the multiplier effect causes gains in total output to be greater than the change in spending that caused it. The term multiplier is usually used in reference to the relationship between government spending and total national income.
Detailed explanation-3: -It is useful in a local setting, for example, when estimations are needed for planning HIV/AIDS prevention programmes in a single city. Using existing information or resources, multiplier method could be used to produce estimates for a large geographic area or at a national level.
Detailed explanation-4: -Availability of Consumer Goods: Rao, “the principle of multiplier does not work vigorously in an underdeveloped country like India on account of inelastic nature of the consumption output curve”. If consumer goods were not available, consumers would not be able to spend their incomes on these goods.