Define the multiplier effect in macroeconomics.

The multiplier effect in macroeconomics refers to the process through which an initial change in spending, such as government expenditure or investment, leads to a more significant increase in overall economic activity. This occurs because an initial expenditure creates income for businesses and individuals, which they, in turn, spend again, prompting further economic activity. This cycle can continue multiple times, resulting in a cumulative effect that is greater than the initial spending amount.

For instance, if the government spends money on building new infrastructure, construction workers receive wages, which they will then spend on goods and services in their community. This spending supports other businesses, which may hire additional workers or expand their services, further multiplying the initial impact of the government's original expenditure. Thus, the multiplier effect highlights how interconnected economic activity is and how initial spending can ripple through the economy, leading to a broader impact than the initial amount spent.