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A-Level Economics · AD shift right (with multiplier) diagram question

The government raises NHS funding, so G rises and AD shifts from AD1 to AD2. WHY does a second shift, AD2 to AD3, follow?

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The answer

The multiplier — every expenditure is someone else's income, which is partly spent again, round after round. The NHS pays the money out as doctors' wages; the doctors spend it; that spending is a second rise in AD. It runs until the injection has leaked out of the circular flow. Whenever one person spends money another person receives it — every expenditure is someone else's income, and that income is partially spent again. Government funds the NHS → doctors' wages rise → doctors spend on consumption → a second increase in AD. That is the multiplier, and the size of it depends on the leakages: savings, taxation and imports.

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