How does income multiply in the economy?

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mkoren | Middle School Teacher | (Level 3) Senior Educator

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The multiplier effect is very important in our economy.  When people get money, they spend or save it.  When they spend it on something, that means somebody else is getting money.  Then that person spends money somewhere which means somebody else is getting money.  This process is repeated over and over expanding the income in our economy.  The same is true when people save money.  When they put it in the bank, the bank will loan some of that money to a person looking to borrow money.  The person who borrows money will either spend it on various products or invest it in a business.  If the person spends it, the process described above begins again.  If the person invests it in a job producing business, people will get money as workers are hired or as the business spends it on supplies, infrastructure, and materials.  This also allows the multiplication of income or money to occur.  This multiplier concept is a very key part of the growth of our economy.  Federal Reserve policies may impact how great or limited the multiplier effect will be by either raising or lowering interest rates.  The next time you spend money, know that it is impacting the growth of income throughout our economy.

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