The size of the multiplier associated with an initial increase in spending will be:
A) the same whether or not inflation occurs.
B) diminished if inflation occurs.
C) zero if any increase in the price level occurs.
D) enhanced if inflation occurs.

Question

Quizplus · Accepted Answer

When inflation occurs, the increase in spending may lead to an increase in the price level. This means that as prices rise, the real value of income falls, and people may reduce their spending. As a result, the multiplier effect is reduced, and the impact on aggregate demand is diminished. Therefore, the size of the multiplier associated with an initial increase in spending is diminished if inflation occurs.

The Size of the Multiplier Associated with an Initial Increase