An initial increase in government spending of $100 billion can create more than $100 billion through what economists call a(n)________ effect.
A) multiplier
B) enhancement
C) interest rate
D) aggregate supply
E) wealth

Question

Quizplus · Accepted Answer

The multiplier effect refers to the increase in economic activity that results from an initial increase in government spending. This occurs because the initial spending increases demand for goods and services, which in turn creates jobs and income for workers and businesses, who then spend their earnings on even more goods and services, generating further economic activity. The size of the multiplier depends on a variety of factors, such as the marginal propensity to consume and the velocity of money.

An Initial Increase in Government Spending of $100 Billion Can