The multiplier effect occurs when:
A) spending by one person generates income for others and causes others to spend more too, increasing the impact of the initial spending on the economy.
B) the level of consumer confidence increases more than predicted given a tax cut.
C) increased spending by one or more individuals causes others to react and increase their savings.
D) None of these is true.

Question

Quizplus · Accepted Answer

The multiplier effect is the phenomenon where an initial increase in spending leads to increases in aggregate demand and final income that are greater than the initial increase. This occurs because the initial increase in spending generates income for others, who then spend more themselves, causing a chain reaction of increased spending and income.

The Multiplier Effect Occurs When