The government builds a new recycling plant. The manager of the company hires workers and pays them an annual salary. These workers then increase their spending. The firms that sell the goods these workers buy also increase their output. This type of effect on spending illustrates the
multiplier effect

Multiplier effect

Explanation:

Multiplier effect refers to the increases in the final income as a result of new injections in spending. It indicates changes in spending that causes changes in real gross domestic product more than the initial change in spending. The scenario presented in the question illustrates multiplier effect. It involves increase in the level of demand in the circular flow of income that stimulates buying and selling.

government spending multiplier effect

Explanation:

In economics, the government spending multiplier effect refers to the increase in household income resulting from an increase in government spending. In macroeconomics, it is calculated by dividing 1 by marginal propensity to save (MPS).

In this case, the government spending was carried out locally, but the effects will benefit households and businesses from the local community and beyond. This effect happens because when the government spends money, the contractor will distribute part of it to its employees and vendors, and keeps the rest as profits that will later be distributed to the stockholders. Those vendors and employees purchase goods and services from other businesses, and the cycle goes on.

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