The Multiplier Effect Essay

Consumption, investment, government spending, and changes in foreign import trade all have an impact on aggregate expenditure. The inference is that the economy is being driven to a greater level of equilibrium, and hence a higher level of GDP is expected. This includes autonomous spending, private-sector investments, government expenditure, and net export income. The term “autonomous spending” refers to those units of an economy’s aggregate expenditure that are unaffected by the same economy’s real level of income. Free spending is vital, and it is considered as automatic regardless of the level at which it occurs, whether at the government or individual level. From various studies, it has been indicated that a decrease in autonomous spending will result in a decline in real income, GDP of an economy (Gordon, 2009).

Change in Autonomous Spending

The multiplier effect refers to the effects of small injection concerning investments in the economy, usually with an aim to bring in a greater change in the amount in the national income of a country. The ideal propensity to spend, which is the decision to spend in households, and the marginal propensity for saving, which is the decision in homes to save, influence the size of the multiplier. These tendencies indicate the amount of extra income which has been set aside for specific accomplishments like investment and spending on international trade. About the 10-year historical period from 2000-2010 in the United States, there are various incidences illustrating a change in autonomous spending.

During the great depression, some leading candidate factors which resulted in a decrease in autonomous spending were identified to be consumption and investment. The reduction in the housing prices in the United States of America in 2008 implicated negatively concerning income of many households. As a result of reduced revenue, the households reduced their consumption levels. The decline in autonomous spending is best explained using the circular flow of income, which is characterized by reduced spending and low income. This process is what is referred to as a multiplier. That is a decrease in consumption and reduced income results to a further decline in spending.

Government Policy Implemented

After that change that affected the autonomous spending in the United States, the government implemented a stabilization policy at that time. Several actions were undertaken by various policymakers in the crisis of 2008 with a focus on addressing the United States’ economy problems. In the process of counteracting the downturn of the United States’ economy, the policymakers shifted from dealing with the financial market’s problems to the establishment of appropriate monetary and fiscal policies. During the Obama tenure, the American Recovery and Reinvestment stimulus package was implemented. This package comprised of about $800 billion in expenditure increment and tax cuts (Holt, & Jamison, 2009).

The Multiplier Effect it had on the Economy

The multiplier effect that resulted from this stabilization policy in the United States of America was that the federal government’s expenditures increased by an estimation of about $90 billion. Also, there was the transfer of income to households which was planned to go higher by an approximation of $100 billion (Hurd, & Rohwedder 2010). The multiplier effect was quite visible because a lot of projects like roads and other constructions started taking place across the United States. To build the public modules of the capital stock, the federal government was focused on infrastructure investments (Hurd, & Rohwedder 2010).

References

Holt, L., & Jamison, M. (2009). Broadband and contributions to economic growth: Lessons from

the US experience. Telecommunications Policy, 33(10), 575-581.

Hurd, M. D., & Rohwedder, S. (2010). Effects of the financial crisis and great recession on

American households (No. w16407). National Bureau of Economic Research.

Gordon, R. (2009). Macroeconomics. Boston, MA: Pearson Education.