Figure 10-1

-What does inflation do to the value of the oversimplified multiplier?
A)Inflation increases the value of the multiplier above the value of the oversimplified formula.
B)Inflation does not change the value of the multiplier.
C)Inflation decreases the value of the multiplier below the value of the oversimplified formula.
D)Inflation increases the value of the multiplier unless the level of unemployment also rises.

Question

Figure 10-1
​ 
-What does inflation do to the value of the oversimplified multiplier?
A)Inflation increases the value of the multiplier above the value of the oversimplified formula. 
B)Inflation does not change the value of the multiplier. 
C)Inflation decreases the value of the multiplier below the value of the oversimplified formula. 
D)Inflation increases the value of the multiplier unless the level of unemployment also rises.

Quizplus · Accepted Answer

Inflation decreases the value of the multiplier below the value of the oversimplified formula. This is because inflation leads to an increase in prices, which means that consumers can purchase fewer goods and services with the same amount of money. This reduces their overall spending, which in turn reduces the impact of any initial increase in spending (represented by the multiplier) on the overall economy. Therefore, when inflation is taken into account, the value of the multiplier is lower than what the oversimplified formula suggests.

Figure 10-1 ​

Figure 10-1