What are the everberations that multiply the intial change into a bigger result?
Everyone’s income depends on someone else’s spending. If you spend $50 dining out at a resturaunt, you have provided $50 of income that will be divided among the resturaunt’s owner, chef, cooks, waiters and suppliers. These people will spend some of the income on goods and services, thus creating income for still other people. At the macro-level, the same kind of reverberation between income and spending is responsible for multiplying a change aggregate demand. Consider the previous example where the Congress increases government spending by $100B. That increase in spending infuses households with more income. In turn, the extra income fuels more consumer spending. The additional consumer spending pumps still more income into households, stimulating even more consumer spending. As the reverberation of spending and income continues, GDP eventually grows by $150B. Diagram 1 illustrates the multiplier reverberations as a series of steps. Step 1. The initial change in spending (G) creates
