Final answer:
The multiplier effect causes an economy's aggregate demand curve to shift disproportionately in relation to changes in initial spending, which can be due to changes in government spending or net exports.
Step-by-step explanation:
The multiplier effect explains why an economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending. The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. For instance, if the government increases spending, there will be an initial boost to demand. However, this increase in spending will subsequently increase incomes for those who received the first round of spending, who are then likely to spend more themselves, leading to further increases in aggregate demand in successive rounds. This process continues, with each subsequent increase in spending being slightly less than the previous round, ultimately resulting in a shift in the aggregate demand curve that is a multiple of the initial round of government spending.
Similarly, if net exports increase, it will shift the aggregate demand curve to the right. Subsequently, the increased spending from exports minus imports is multiplied throughout the economy, leading to greater overall shifts in aggregate demand. Conversely, a decrease in net exports or government spending will shift the aggregate demand curve to the left. Again, the multiplier effect ensures that the total impact on aggregate demand is greater than the initial change in spending.