Answer:
Multiplier effect in the 4th round = 3.58
Explanation:
A change in aggregate demand can create a much greater impact in the equilibrium national income. This is known as the multiplier effect. This occurs when injections of new demand for goods and services into the circular flow of income creates further rounds of spending. For example, if the government spending was on building new affordable houses then the need for housing materials will create demand for wood, cement and other housing supplies. Thus, these businesses will see a rise in sales. Whilst they benefit through profits, their employees would benefit from wages and salaries. As their income rises, they will spend it in the economy, and so will the businesses from their profits. This additional rounds of spending is the multiplier effect.
If a 100 increase creates 33 for the second round, it is 33% (33/100 x 100) i.e. 100 x 33% = 33
This is proven since 33 x 33% = 10.89 in the third round.
Hence, the multiplier effect in the forth round = 10.89 x 33% = 3.58
The value to be recycled in the 4th round will be 3.59
Suppose that the initial increase in the government spending was 100, that mean, there is increase in income in the economy by 100.
Now, 33 will be recycled back into purchases of domestically produced goods, that is, 33 is spent back in the economy. In other word, the 33 out of 100 increase is spent back in the economy.
We are given that in the third round, only 10.89 is spent into the economy. that is, its created an income of 10.89
Now, out of the 10.89, 33% would be recycled back in the 4th round.
So, the value to be recycled in the 4th round will be 3.59 (10.89*0.33).
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