The size of the multiplier associated with an initial increase in spending will be
A) the same whether or not inﬂation occurs.
B) diminished if inﬂation occurs.
C) zero if any increase in the price level occurs.
D) enhanced if inﬂation occurs.

Question

Quizplus · Accepted Answer

Inflation can limit the effectiveness of the multiplier effect because it can cause prices to rise, leading to a decrease in real output and limiting the increase in spending. Therefore, the size of the multiplier is diminished if inflation occurs.

The Size of the Multiplier Associated with an Initial Increase