When government spending is increased, the amount of the increase in aggregate demand primarily depends on
A) the average propensity to consume.
B) the size of the multiplier.
C) income taxes.
D) exchange rates.

Question

Quizplus · Accepted Answer

The size of the multiplier determines the extent to which an increase in government spending will amplify aggregate demand. The multiplier effect occurs because the increase in government spending leads to increased income for individuals and businesses, who in turn spend some of that income, further increasing demand. The size of the multiplier is affected by factors such as the marginal propensity to consume and the marginal tax rate, but these factors do not primarily determine the amount of the increase in aggregate demand. Income taxes and exchange rates may have an indirect effect on aggregate demand, but they are not the primary drivers of the increase.

When Government Spending Is Increased, the Amount of the Increase