The multiplier effect
A)and the crowding-out effect both amplify the effects of an increase in government expenditures.
B)and the crowding-out effect both diminish the effects of an increase in government expenditures.
C)diminishes the effects of an increase in government expenditures,while the crowding-out effect amplifies the effects.
D)amplifies the effects of an increase in government expenditures,while the crowding-out effect diminishes the effects.

Question

Quizplus · Accepted Answer

The multiplier effect refers to the concept that an increase in government expenditures leads to an increase in aggregate demand, which in turn leads to an increase in income and consumption, which further stimulates economic growth. This amplifies the effects of the increase in government expenditures. On the other hand, the crowding-out effect occurs when government expenditures increase, causing interest rates to rise, which reduces private investment and consumption. This diminishes the effects of the increase in government expenditures. Therefore, choice D is the best answer, as it correctly states that the multiplier effect amplifies the effects, while the crowding-out effect diminishes them.

The Multiplier Effect