ShmoopTube

00:00

and finance Allah shmoop What is an economic multiplier All

00:08

right people To understand how injections of investments in cash

00:12

affect the economy macroeconomist often turned to the keen Zeon

00:15

idea of the economic multiplier Every time you spend a

00:19

dollar well that dollar eventually becomes someone else's income Likewise

00:24

every dollar you get was once someone else's income that

00:28

they spent The more we all spend in dollars while

00:32

the more dollars we all have to spend every time

00:35

Dollars which hands While that's a ching that stimulates even

00:38

Mohr Chuck Ching's in the economy this money going around

00:41

around as referred to as the circular flow of income

00:45

and in theory more spending and investment leads to even

00:49

more spending and investments It's kind of a domino effect

00:52

which ripples outward into the entire economy boosting output GDP

00:56

and employment well The economic multiplier measures how a change

01:00

in aggregate demand affects nationwide output Usually GDP like that's

01:05

the big measure through the ripple effect of the circular

01:08

flow of income Well as demands for goods services and

01:11

investments rise more money is flowing through the pipes of

01:13

the economy raising GDP and increasing economic growth Yeah Ching

01:17

city When demand for goods services and investments fall the

01:21

reduction in money flowing through the pipes contracts the economy

01:24

making GDP slow down to a trickle or even go

01:27

negative Sometimes when the economy slows down the Fed a

01:30

k a The Federal Reserve or the U S Central

01:32

bank may decide to lower interest rates Lowering interest rates

01:36

means things like business loans car loans credit cards stuff

01:40

mortgages and other types of debt are then cheaper in

01:43

theory encouraging consumers to borrow more Lowering interest rates the

01:47

equivalent of the Fed putting debt on sale which draws

01:50

in investors and spenders who then use that money spurring

01:53

more spending hopefully from their spending raising interest rates has

01:57

the opposite effect Reducing the demand for investing been spending

02:00

since is more expensive than to rent money Well for

02:03

instance let's say the Fed lowers interest rates Around the

02:05

same time Farmer Frannie was thinking about expanding her chicken

02:09

business Farmer Franny decides that taking out the loan is

02:13

worth it since she only has to pay one point

02:15

five percent interest on it Farmer Franey then uses her

02:18

loan to build Mohr chicken coops increasing the income of

02:21

the local farm outlet store and making room for Mohr

02:25

chickens to be grown and more eggs and more feathers

02:28

for beds Well some of those eggs turn into chickens

02:30

and some chickens have more eggs and to say which

02:33

came first Well farmer friend he's selling chickens and eggs

02:36

left and right and she easily pays off her really

02:38

inexpensive loan Now friend he has more money than she

02:42

would have had before which she then spends Will those

02:44

dollars travel and become other people's incomes creating Mohr economic

02:49

growth Eventually Farmer Frannie's farming business is doing well enough

02:52

that she takes out a loan to expand her farm

02:54

even further buying up the latest in farming equipment and

02:58

hiring more workers Tio take care of the whole thing

03:01

Well Farmer for any second loan puts money in the

03:03

pocket of the landowners she bought The land from right

03:06

also spends money on the companies selling to her the

03:09

new farm equipment and the incomes of her new employer

03:12

That money keeps branching outward into the economy Is it

03:15

continues this circular ripple effect like a pebble in a

03:18

pond to be spent turning into someone else's paycheck or

03:21

business investment And of course the money will only continue

03:24

to ripple outward if people keep spending it well Factors

03:27

like taxes consumer confidence in the economy and government spending

03:31

can determine how strong those ripples are how strong that

03:35

economic multiplier is at any given time for instance consumers

03:39

also have varying propensities to consume and safe depending on

03:43

how much well they're paying Tax high taxes might make

03:46

people buy less usually does just because taxes cut into

03:49

their buying power which would lower the economic multiplier Right

03:53

Well don't get too excited about all this The economic

03:55

multiplier isn't necessarily a good argument for the reason your

03:59

tax bill should be lower If taxes air low making

04:02

government revenue low well then the government may find itself

04:04

borrowing money from abroad And all that can cause interest

04:07

rates to rise over time reducing demand for investment and

04:11

spending in reducing the economic multiply right well another important

04:14

factor that affects the economic multiplier imports Yeah imports The

04:18

more money that's being spent in foreign markets will the

04:21

more that's leaking out of our national income producing our

04:25

economic multiplier of the home country U S A U

04:29

s A and our GDP when there's a change in

04:32

taxes or interest rates or confidence in the economy Well

04:35

the multiplication effects kind of lesson all right But in

04:38

the long run economists expect things like reduced interest rates

04:41

tax cuts stimulus packages and renewed confidence in the economy

04:45

to have positive multiplier effect OK now get out there

04:48

and spend knowing that every dollar you spend is contributing

04:51

to someone else's income in the short run and the

04:53

economic multiplier in the long run Yeah way to be 00:04:55.887 --> [endTime] a team player by that portion

Full Transcript