In the Keynesian-cross model, fiscal policy has a multiplier effect on income because fiscal policy:
A)increases the amount of money in the economy.
B)changes income, which changes consumption, which further changes income.
C)is government spending and, therefore, more powerful than private spending.
D)changes the interest rate.

Question

Quizplus · Accepted Answer

Fiscal policy, such as government spending or taxation changes, can have a multiplier effect on income because it changes the level of income, which further changes consumption and therefore income again. This is the essence of the Keynesian cross model, which shows how changes in spending can affect the level of income in an economy. The multiplier effect occurs because an initial change in spending leads to a series of further changes in spending as one person's spending becomes another person's income. This process continues until the total increase in spending is a multiple of the initial change.

In the Keynesian-Cross Model, Fiscal Policy Has a Multiplier Effect