The multiplier effect is an important concept in macroeconomics that explains how changes in autonomous spending can have a larger impact on overall economic activity. It relates to the relationship between changes in spending and the resulting changes in real output or income in an economy.

In terms of real output, the multiplier effect works in the following way:

1. Initial increase in spending: The multiplier effect begins with an initial increase in spending, which can come from any source such as government spending, investment, or consumer spending. This initial increase in spending is known as autonomous spending.

2. Increase in income and consumption: When there is an initial increase in spending, it leads to an increase in income for the recipients of that spending. This increase in income, in turn, leads to an increase in consumption, as individuals have more disposable income to spend on goods and services.

3. Increase in aggregate demand: As consumption increases, businesses experience higher demand for their products, prompting them to increase production to meet this demand. This increase in production leads to an increase in overall economic activity and real output.

4. Further increase in income and consumption: The increased production and economic activity result in higher incomes for workers and businesses. This increase in income leads to further increases in consumption, creating a positive feedback loop.

5. Iterative process: The multiplier effect continues as the increased consumption leads to further increases in production, income, and consumption. This process continues until the initial increase in spending is exhausted.

The multiplier effect works in terms of both money income and real output. As the initial increase in spending leads to an increase in aggregate demand, it stimulates economic activity, resulting in higher levels of production and output. The increase in income and consumption further drives economic growth, creating a multiplier effect that amplifies the initial impact of spending.

Overall, the multiplier effect demonstrates how changes in spending can have a significant impact on real output and income in an economy, showing the interconnectedness of different sectors and the potential for economic growth through increased spending.