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Understanding Multiplier Effect

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Basic Concept: Multiplier effect measures proportional increase in income from capital injections
Calculated as change in income divided by change in spending
Every dollar of investment produces an extra dollar of income
Types of Multipliers: Money multiplier shows banks' ability to amplify central bank reserves
Deposit multiplier demonstrates fractional reserve banking's lending effect
Fiscal multiplier measures government spending's impact on GDP
Investment multiplier quantifies positive effects from business spending
Keynesian Perspective: Keynesian theory states government spending creates more business activity
Multiplier effect leads to increased income for companies and workers
Government spending creates more supply and aggregate demand
Money Supply Multiplier: Banks can lend one minus reserve requirement to others
Multiplier depends on reserve requirement ratio
Fed reduced reserve requirement to 0% during COVID-19 pandemic
Higher reserve requirement increases money supply multiplier
Economic Impact: Multiplier effect often leads to positive economic growth
Direct, indirect, and induced impacts occur through financial transactions
High multipliers generally indicate better economic outcomes