The multiplier effect tends to
A) generate instability.
B) promote stability of the general price level.
C) magnify small changes in spending into much larger changes in real Gross Domestic Product (GDP).
D) increase the MPC.

Question

Quizplus · Accepted Answer

The multiplier effect refers to the idea that an initial change in spending (such as an increase in government spending or investment) can have a bigger impact on the overall economy than the initial change itself. This is because the increase in spending leads to increased income and consumption, which in turn leads to further increases in income and consumption. As a result, small changes in spending can be magnified into much larger changes in real GDP. This tends to promote stability in the general price level by increasing overall economic activity. The multiplier effect does not inherently generate instability or necessarily increase the MPC (marginal propensity to consume).

The Multiplier Effect Tends to