Macro Minute -- The Multiplier Effect - Hey, everyone, I'm Mr. [? Willis, ?] and this is your Macro Minute on the multiplier effect. The multiplier effect refers to any changes in consumer spending that result from any real GDP growth or contraction brought about by the use of fiscal policy. When government increases its spending, it stimulates aggregate demand, and causes some real GDP growth. That growth creates jobs, and more workers earn income. That new income sparks greater consumer spending, which drives aggregate demand even more, and causes additional real GDP growth. When government decreases its spending, it reduces aggregate demand, and causes some real GDP contraction. That contraction eliminates jobs, and less workers earn income. That reduction in income slows consumer spending, which reduces aggregate demand even more, and causes additional real GDP contraction. When government decreases personal taxes, it increases consumer spending, which stimulates aggregate demand, and causes some real GDP growth. That growth creates jobs, and more workers earn income. That new income sparks greater consumer spending, which drives aggregate demand even more, and causes additional real GDP growth. When government increases personal taxes, it slows consumer spending, which reduces aggregate demand, and causes some real GDP contraction. That contraction eliminates jobs, and less workers earn income. That reduction in income slows consumer spending, which reduces aggregate demand even more, and causes additional real GDP contraction. Like ripples in a pond, the initial policy sets off a wave of change in consumer spending and real GDP [? output. ?] When government uses fiscal policy to correct economic conditions, we must account for not only the change created by the policy initially, but also the wave of changes that extend throughout the economy afterwards. That's the multiplier effect. Thank you so much for watching. That's the multiplier effect, and has been your Macro Minute. [MUSIC PLAYING]