The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy,because it
A)reduces investment and thereby increases consumer spending.
B)increases the money supply and thereby reduces interest rates.
C)increases income and thereby increases consumer spending.
D)decreases income and thereby increases consumer spending.

Question

Quizplus · Accepted Answer

The multiplier effect increases income, which in turn increases consumer spending. This happens because an increase in government spending or a decrease in taxes leads to increased demand for goods and services, which leads to increased production and increased employment. As more people are employed, they have more income to spend, which further increases aggregate demand. Therefore, the multiplier effect is a result of increased income and subsequent consumer spending, making option C the correct choice.

The Multiplier Effect States That There Are Additional Shifts in Aggregate