The multiplier effect is the:
A) subsequent consumer spending that increases AD from expansionary fiscal policy.
B) subsequent consumer spending that increases AD from contractionary fiscal policy.
C) increase in GDP from an increase in the money supply and decrease in taxes.
D) increase in GDP from increased consumer savings and private investment.

Question

Quizplus · Accepted Answer

The multiplier effect refers to the subsequent increase in consumer spending that is triggered by expansionary fiscal policy, which leads to an increase in Aggregate Demand (AD) and ultimately an increase in GDP. Contrary to this, option B seems counterintuitive as contractionary fiscal policy does not necessarily lead to an increase in consumer spending, but rather a decrease. Option C is incorrect because a decrease in taxes and an increase in the money supply would both lead to an increase in consumption spending, but it is not the only way to achieve the multiplier effect. Option D is also incorrect as increased savings and private investment do not lead to an immediate increase in AD and GDP.

The Multiplier Effect Is The