What is the multiplier effect?

The multiplier effect refers to the ability of sudden, increased demand to create additional demand in local goods and services. Money that is injected into a region, be it through government spending on local infrastructure, new investment by businesses or tourism, creates the effect.

Multiplier effects can also come from a decrease in taxes, a change in the exchange rate between currencies or an increase in exports. That money that is spent on goods and services, in turn, encourages consumption by those individuals that receive the new influx of wages and sales. The multiplier effect is determined by how much a particular amount of spent money increases demand and income within an area.