The multiplier effect occurs when:
A) spending by one person generates income for others and causes them to spend more too.
B) the level of consumer confidence increases more than predicted given a tax cut.
C) increased spending by one or more individuals causes others to increase their savings.
D) None of these are true.

Question

Quizplus · Accepted Answer

The multiplier effect refers to the idea that an increase in spending by one person can generate income for others, who in turn will spend more, thus creating a cascade effect on the overall economy. This is the basic concept behind fiscal policy measures like stimulus spending, which aim to boost economic growth by increasing spending and stimulating consumption. Therefore, option A is the correct answer. Options B and C are incorrect, as they do not describe the multiplier effect. Option D is also incorrect, as the multiplier effect is a well-documented phenomenon in economics.

The Multiplier Effect Occurs When