Question

Explain how the multiplier process works with respect to the proposed infrastructure spending in Australia;

Answer 1

Multiplier means initial investment or spending by government leads to multiple rise in income. When government makes expenditure on infrastructure projects, there is multiple rise in total income in whole economy.

Process can be explained with following example:

• Initial increase in spending on infrastructure projects.
• Incomes of workers and firms associated with such project increase.
• These workers and firms make further expenditure, which in turn, further leads to rise in income of other people or firms.
• Thus, process keeps on moving leads to multiple rise in income.
• Value of multiplier depends on Marginal propensity to consume (MPC). Higher the MPC, higher would be multiplier of infrastructural project.