Changes in government spending cause income and output to rise or fall by the spending change times the multiplier.

Question

Quizplus · Accepted Answer

This is known as the government spending multiplier effect, which is a fundamental concept in macroeconomics. When the government increases or decreases its spending, it has a ripple effect throughout the economy, leading to changes in income and output. The size of this effect depends on the multiplier, which is determined by factors such as the marginal propensity to consume and the degree of economic slack.

Changes in Government Spending Cause Income and Output to Rise