Final answer:
To find the multiplier, the total change in income ($212) after all rounds of spending is divided by the initial investment decrease ($173), resulting in a multiplier of 1.225.
Step-by-step explanation:
To calculate the multiplier in the economy based on the given scenario, we need to sum up the total change in income from all the rounds of spending and divide it by the original change in investment spending. In this case, a $173 decrease in investment spending leads to a $173 decline in first-round income and an additional $39 decline in second-round income. Therefore, the total decline in income after the two rounds is $173 + $39 = $212.
The multiplier is calculated by dividing this total income change by the initial decrease in investment spending:
Multiplier = Total Change in Income / Initial Change in Investment
Multiplier = $212 / $173 = 1.225
The multiplier effect in the economy measures the impact of changes in initial spending on overall income. In this scenario, a $173 reduction in investment spending triggers a cascade of income declines. The first-round results in a direct $173 income reduction, followed by a secondary impact of an extra $39. When totaling these changes, the overall income decline after two rounds is $212. The multiplier is derived by dividing this total income change by the initial decrease in investment spending, resulting in a multiplier of 1.225. This implies that each dollar reduction in investment spending leads to a $1.225 reduction in total income after multiple rounds of spending.