Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?
A) To fund the government spending, more money must be printed. The resulting increase in money supply lowers interest rates which in turn stimulates consumption and investment spending.
B) The initial change in spending will cause an increase in real GDP and it also becomes income to someone else. As a result, the government's tax revenue increases which in turn allows the government to further increase its spending.
C) The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption.
D) The initial change in government spending creates a supply of jobs and stimulates production of domestically produced goods and services. The resulting increases in wages and investment demand leads to increased real GDP.

Question

Quizplus · Accepted Answer

The multiplier effect occurs when an initial increase in spending leads to a larger increase in overall economic activity. Government spending on highways increases demand for goods and services, raising incomes and leading to further consumption.

Which of the Following Best Explains the Multiplier Effect as a Result