Question

What is the central economic idea humorously illustrated in the Last Word “TopplingDominoes”? How does the central idea relate to economic recessions, on the one hand, and vigorous economic expansions, on the other?

Short answer

The central economic idea illustrated in ‘Toppling Dominoes’ is the multiplier effect. The multiplier effect increases the effect of an initial increase or decrease in aggregate spending components in multiple cycles, spreading the effect on other components and resulting in greater changes in income. This causes an economy to suffer from recession or enjoy economic expansion.

Step-by-step solution

Explanation of the central idea

The article demonstrates an economic recession in the local economy that started due to a fall in the private consumption expenditure of Mr Ajani. A decrease in one aggregate spending component translated into reductions in other components. Thus, the overall fall in income is higher than the initial fall in Mr Ajani’s expenditure. The effect is due to the presence of a multiplier.

Changes in income are directly related to the change in investment and consumption, per the multiplier effect. The declined income due to declined consumption further reduced the investment capacity of the economy. Thus, the investment in the local economy declined because Humbug backed out from investment in the landscape. The decline in investment further lowered the local economy’s income, and again the private consumption fell as the landscaper refused to consume TV.

Central idea concerning an economic recession 

The initial reduction in one aggregate spending component spreads to the whole economy. The economy gets trapped into a recessionary phase, where low consumption leads to low investment, output, income, and again low consumption. This cycle of lower spending inducing lower-income repeated for many rounds demonstrate the multiplier effect.

Central idea in relation with the economic expansion

Similar to the economic recession due to the fall in spending, an economy might go through vigorous economic expansion if the economy constantly keeps receiving increment in spending and induced increase in income following the multiplier effect.

An increase in income due to an increase in consumption and investment expenditure will further increase the consumption and investment capacity of the economy. So investment and consumption increase the economy’s income multiple times. Suppose the process of multiplied income effect repeats itself over a longer period. In that case, the economy’s income and output will expand rapidly, and the economy will pass through an expansionary phase.

Therefore, a positive multiplier effect will lead the economy towards expansion.