The Reverse Multiplier Flashcards
(2 cards)
1
Q
What is the reverse multiplier
A
This is a continuous process of fall in in induced consumption and income which shifts the AD curve leftward repeatedly.
2
Q
How does the reverse multiplier work
A
Example:
A rise in import expenditure reduces the AD of domestically consumed g/s. This causes accumulation of inventory prompting firms to reduce production. This would lower the acquiring of factor inputs such as workers. This decreases the income earned by workers and lowers their ability to consumer, reducing expenditure on g/s. Consequently, there will be a cyclical fall in income and consumption on g/s, shifting the AD curve leftward repeatedly.
