Note about Multiplier and Accleration effects

I thought that I did not show a lot of work during last week. So I am writing about the notes that I took while I was reading the topic about multiplier and acceleration effects.

Multiplier Effect

Meaning: An initial change in AD can have so much greater impact on equilibrium national income.
Causes- Because injections of demand into the circular flow of income stimulate further rounds of spending.

Ex) One person is spending another`s income---> this effects output and employment

The final output is far more greater than initial injection of demand

• John Maynard Keynes suggested it as a tool to help governments to achieve full employments.
• `Demand management Approach`-> overcome a shortage of capital investment
• Measured the amount of Gov. spending needed to reach a level of national income that would prevent unemployment.
• The higher propensity to consume domestic goods and services, the higher multiplier effect gets.
• Government can change the size of multiplier by putting direct tax.
  Ex) Cut in income tax, encourage people to spend more.
• Propensity to purchase imports
  Ex) No extra income, prefer to buy imports, this kind of demand is not passed on in the form of fresh spending on domestically produced output. It leaks away from the circular form of income and spending, finally reducing the size of multiplier.
• To get high multiplier effect, they need sufficient spare capacity for extra output to be produced.
• Increase in AD when Short Run AS is highly elastic, this leads to a large rise in national output and a large multiplier effect
  
  
  Acceleration Effect
• The strength of demand for goods and services-> planned level of capital investment
• The higher business`s confidence and profit, the more acceleration effect with rise in planned capital investment.
• More spare-> more elastic supply
  
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