Explain the logic of the multiplier effect

What will be an ideal response?

The idea of the multiplier effect is that a change in autonomous spending leads to a greater change in equilibrium income. For example, suppose there is a $10 million initial increase in investment spending. This additional demand will initially increase output, income, and aggregate demand by $10 million. If we assume the MPC = 0.8, the $10 million in additional income will lead to $8 million in increased consumer spending ($10 million × the MPC of 0.8). With this $8 million increase in consumer demand, output, income, and aggregate demand will increase by another $8 million. This will increase consumer spending by an additional $6.4 million ($8 million × 0.8). This increased demand will increase output, income, and aggregate demand by $6.4 million, generating further increases in consumer spending of $5.12 million. As this process continues over time, total spending will continue to increase, but in diminishing amounts. If all the spending from the (infinite) rounds is added up, the initial $10 million increase in investment spending will generate a total increase in equilibrium income of $50 million. In this case, the multiplier is 5 ($10 million × 5 = $50 million). (The value of the multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.