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The Multiplier Effect

In microeconomics, things are assumed to be constant; However, in macroeconomics, the after effects are also taken into account. The Multiplier Effect discusses the repercussions of initial changes in expenditures which amplify the initial effects. A change in price level has the potential to affect many different parts of the economy either in positive or in adverse ways depending on how the effects happen. The multiplier effect takes the initial wealth, international, and interest rate effects and amplifies these original effects. For example, a Mercedes plant locating in a city may create jobs, revenue, and knowledge spillovers.  This can help to improve the local economy through the multiplier effect.

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