Assume the government cancels a large infrastructure program,causing construction firms in the area to earn less and lay off workers.Consequently,businesses in the area suffer from a decrease in sales.This story illustrates:
A) a reverse multiplier effect.
B) an increase in aggregate demand.
C) a negative technology shock.
D) the crowding out effect.

Question

Quizplus · Accepted Answer

The situation described in the story is an example of a reverse multiplier effect, where the initial decrease in government spending leads to decreased income and spending for firms and households, resulting in a further decrease in economic activity. This is different from a positive multiplier effect, where an initial increase in spending leads to increased income and spending throughout the economy. The other options listed (increase in aggregate demand, negative technology shock, and crowding out effect) do not accurately describe this situation.

Assume the Government Cancels a Large Infrastructure Program,causing Construction Firms