The notion that a change in autonomous aggregate expenditures produces a larger change in equilibrium real GDP in the aggregate expenditures model is called the
A) permanent income effect.
B) current income effect.
C) multiplier effect.
D) marginal propensity to consume.

Question

Quizplus · Accepted Answer

The multiplier effect describes the phenomenon that a change in autonomous aggregate expenditures, such as an increase in government spending or a tax cut, can lead to a larger change in equilibrium real GDP. This occurs because the initial change stimulates additional rounds of spending by households and businesses, as their incomes rise and they increase their own expenditures. The size of the multiplier effect depends on the marginal propensity to consume (MPC), which is the fraction of additional income that is spent rather than saved. The larger the MPC, the larger the multiplier effect.

The Notion That a Change in Autonomous Aggregate Expenditures Produces