Agnes spends $80 on a new winter coat. According to the multiplier effect, her purchase will increase total expenditures by more than $80.
A multiplier effect is an effect in which an increase in total expenditures produces an increase in national income and consumption, which is greater than the initial amount spent on the purchase.
The multiplier effect refers to the increase in final income arising from any new spending. Thus, the size of the multiplier depends upon household's marginal decisions to spend, called the marginal propensity to consume, or to save.
Hence, the multiplier effect exists because production and expenditures are interdependent.
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