Trickle-Down Theory

and finance Allah shmoop What is an economic multiplier All

right people To understand how injections of investments in cash

affect the economy macroeconomist often turned to the keen Zeon

idea of the economic multiplier Every time you spend a

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

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

they spent The more we all spend in dollars while

the more dollars we all have to spend every time

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

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

around as referred to as the circular flow of income

and in theory more spending and investment leads to even

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

which ripples outward into the entire economy boosting output GDP

and employment well The economic multiplier measures how a change

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

the big measure through the ripple effect of the circular

flow of income Well as demands for goods services and

investments rise more money is flowing through the pipes of

the economy raising GDP and increasing economic growth Yeah Ching

city When demand for goods services and investments fall the

reduction in money flowing through the pipes contracts the economy

making GDP slow down to a trickle or even go

negative Sometimes when the economy slows down the Fed a

k a The Federal Reserve or the U S Central

bank may decide to lower interest rates Lowering interest rates

means things like business loans car loans credit cards stuff

mortgages and other types of debt are then cheaper in

theory encouraging consumers to borrow more Lowering interest rates the

equivalent of the Fed putting debt on sale which draws

in investors and spenders who then use that money spurring

more spending hopefully from their spending raising interest rates has

the opposite effect Reducing the demand for investing been spending

since is more expensive than to rent money Well for

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

same time Farmer Frannie was thinking about expanding her chicken

business Farmer Franny decides that taking out the loan is

worth it since she only has to pay one point

five percent interest on it Farmer Franey then uses her

loan to build Mohr chicken coops increasing the income of

the local farm outlet store and making room for Mohr

chickens to be grown and more eggs and more feathers

for beds Well some of those eggs turn into chickens

and some chickens have more eggs and to say which

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

left and right and she easily pays off her really

inexpensive loan Now friend he has more money than she

would have had before which she then spends Will those

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

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

that she takes out a loan to expand her farm

even further buying up the latest in farming equipment and

hiring more workers Tio take care of the whole thing

Well Farmer for any second loan puts money in the

pocket of the landowners she bought The land from right

also spends money on the companies selling to her the

new farm equipment and the incomes of her new employer

That money keeps branching outward into the economy Is it

continues this circular ripple effect like a pebble in a

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

business investment And of course the money will only continue

to ripple outward if people keep spending it well Factors

like taxes consumer confidence in the economy and government spending

can determine how strong those ripples are how strong that

economic multiplier is at any given time for instance consumers

also have varying propensities to consume and safe depending on

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

people buy less usually does just because taxes cut into

their buying power which would lower the economic multiplier Right

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

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

tax bill should be lower If taxes air low making

government revenue low well then the government may find itself

borrowing money from abroad And all that can cause interest

rates to rise over time reducing demand for investment and

spending in reducing the economic multiply right well another important

factor that affects the economic multiplier imports Yeah imports The

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

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

economic multiplier of the home country U S A U

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

taxes or interest rates or confidence in the economy Well

the multiplication effects kind of lesson all right But in

the long run economists expect things like reduced interest rates

tax cuts stimulus packages and renewed confidence in the economy

to have positive multiplier effect OK now get out there

and spend knowing that every dollar you spend is contributing

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

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