The multiplier effect from an increase in government spending causes additional increases in aggregate demand through:
A) a decrease in taxes.
B) even more government spending.
C) an increase in consumer spending.
D) a decrease in interest rates.

Question

Quizplus · Accepted Answer

The multiplier effect occurs when an increase in government spending leads to an increase in consumer spending. As government spending increases, the incomes of individuals and businesses that receive government contracts or subsidies also increase, leading to an increase in their consumption and investment spending. This, in turn, leads to higher total spending in the economy, creating a multiplier effect. Choices A and D are not directly related to the multiplier effect, and choice B simply reiterates the initial premise of government spending increases.

The Multiplier Effect from an Increase in Government Spending Causes