The multiplier effect
A) tells us nothing about how increases in investment spending affect GDP
B) tells us that a change in investment spending changes equilibrium GDP by more than the change in investment
C) works only for increases in investment
D) is relevant only in situations where the marginal propensity to consume cannot be determined
E) is relevant only in situations in which the MPC is between 0.5 and 0.7.

Question

Quizplus · Accepted Answer

The multiplier effect is the concept that a change in investment spending (or any other autonomous spending) will lead to a greater change in equilibrium GDP. Specifically, the change in GDP is equal to the initial change in spending divided by the multiplier. The multiplier is equal to 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, the multiplier effect works for both increases and decreases in investment spending, and is based on the MPC, which can be determined from data or estimated through surveys. The answer choices A, C, D, and E are incorrect because they either provide incorrect or incomplete information about the multiplier effect.

The Multiplier Effect