The decrease in wealth due to the stock market crash effects the aggregate demand curve which decreases to D2 decreasing the prices to P2.
The aggregate demand is a function of government spending, and taxes. As a result when government spending increases and the taxes decrease the aggregate demand increases to D2 and the prices increase to P2 increasing the employment in the market as well by creating more jobs.
The multiplier is a value by which the results of the market change and shifts in the demand and supply as well as the changes in the aggregate components can have a greater effect than the trigger. The basic formula for calculating the multiplier in an economy is dividing the change in the equilibrium by the change in the investment spending.
The multiplier effect has been depicted in the graph where the increase in the spending triggers a larger increase in national income. “The level at which national product and total spending are equal shifts by a multiple of the original shift in spending–hence the name ‘multiplier’” (Delong, 1998)
The diagrams in Q1d also depict the multiplier effect. The decrease in demand spending and expenditure in the market, by a small amount, while the national income is decreased by a larger portion. Similarly the increase in the demand curve due to increased government spending and decreased taxes increases the overall spending in the market. The small increase in spending results in a larger increase in the national income which is increased by a greater percentage.
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