One of the three reasons as to why the oversimplified multiplier formula overstates the multiplier is that it ignores price-level changes, which reduce the multiplier.

Question

Quizplus · Accepted Answer

When there are price-level changes, the increase in output due to the initial increase in spending gets partially offset by an increase in prices. This reduces the overall impact of the multiplier effect. Therefore, the oversimplified multiplier formula that ignores price-level changes tends to overstate the multiplier.

One of the Three Reasons as to Why the Oversimplified