One of the important concepts that show the expansionary and contractionary effects is the multiplier concept. Multiplier model is based on the premise that fluctuation in the Aggregate Demand (AD) with a stable Aggregate Supply (AS) would change the national output by more than the change in aggregate demand. You all know the components of aggregate demand are Personal Consumption, Gross Investment, Government purchases of Goods and Services, the Net Exports (Exports-Imports). In the multiplier model small changes in AD would cause a amplified change in the level of output. This principle seem be working until the rising inflation in 1970’s primarily due to higher oil prices imposed by the OPEC. This rising prices caused the AS curve to shift leftward which offset the effects of increases in Aggregate demand.
How would you explain this property intuitively with an everyday example related to you?
(Minimum of 75 words)
One of the important concepts that show the expansionary and contractionary effe
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