Multiplied process assume existence of excess capacity in economy?what is referred by these lines?
Shivang,
The multiplier process assumes existence of excess capacity in the economy. Let us suppose that the demand for consumer goods increased. Since there exists excess capacity or more than what is required to produce, the same can be used to meet the additional demand. However, if there does not exist excess capacity, the new investment needs to be done to meet the additional demand. It will cause a rise in price level. However, with excess capacity, there will be an increase in real income, output etc.
The multiplier process assumes existence of excess capacity in the economy. Let us suppose that the demand for consumer goods increased. Since there exists excess capacity or more than what is required to produce, the same can be used to meet the additional demand. However, if there does not exist excess capacity, the new investment needs to be done to meet the additional demand. It will cause a rise in price level. However, with excess capacity, there will be an increase in real income, output etc.