Author Question: What is the multiplier effect and when do multiplier effects occur? What will be an ideal ... (Read 141 times)

Lobcity · **on:** Jun 30, 2018

What is the multiplier effect and when do multiplier effects occur?

What will be an ideal response?

Question 2

What is the divine coincidence? When and why does it not hold true?

What will be an ideal response?

Zebsrer · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The multiplier effect is a series of induced increases (or decreases) in consumption spending that results from an initial increase (or decrease) in autonomous expenditures. The multiplier effect amplifies the effect of economic shocks on real GDP. Multiplier effects occur whenever there is a change in autonomous expenditures, which is spending that does not depend on income.

Answer to Question 2

The divine coincidence is the ability to achieve both inflation stability and output stability at the same time. The divine coincidence fails when there is a temporary supply shock. When the short-run aggregate supply curve shifts along the aggregate demand curve, both output and inflation gaps result. The only policy response is to shift the aggregate demand curve. Because the SRAS curve has a positive slope, shifting of the AD curve must enlarge one gap in order to reduce the other.