An increase in government expenditure has a multiplier effect on aggregate demand due to:
A) the additional spending by consumers stimulated by the actual government expenditure.
B) the negative slope of the consumption function.
C) the fact that the marginal propensity to consume is larger than one.
D) the autonomous nature of private consumption expenditure.

Question

Quizplus · Accepted Answer

An increase in government expenditure will lead to additional spending by consumers, as they have more money to spend due to higher government spending. This additional spending by consumers will further increase aggregate demand and have a multiplier effect on the economy. Option B is incorrect as the negative slope of the consumption function refers to the fact that as disposable income increases, the proportion of income spent on consumption decreases, and not relevant in this context. Option C is incorrect as the marginal propensity to consume is usually less than one, indicating that consumers do not spend all additional income received. Option D is incorrect as private consumption expenditure is not autonomous, it is influenced by factors such as disposable income, interest rates, etc.

An Increase in Government Expenditure Has a Multiplier Effect on Aggregate