The multiplier model implies that
A) additional spending by the government will be a multiple of the tax rise needed to fund the spending.
B) changes in autonomous spending will lead to an increase in national income which is greater than the initial increase in spending.
C) changes in government spending will always lead to a proportionate increase in national income.
D) there are no leakages from the circular flow of income.
E) aggregate demand rises by a constant multiple of the change in consumption spending.

Question

Quizplus · Accepted Answer

The multiplier model states that changes in autonomous spending (such as government spending) will lead to an increase in national income that is greater than the initial increase in spending. This is because the increased spending creates a multiplier effect as more income is generated and spent in the economy. The magnitude of the multiplier effect depends on the marginal propensity to consume (MPC), which is the fraction of additional income that is spent on consumption. The multiplier model also takes into consideration leakages from the circular flow of income, such as savings and imports, which reduces the overall size of the multiplier effect.

The Multiplier Model Implies That