The multiplier principle is important because it
A) was central to economic theory before Keynes.
B) implies that investment will help stabilize the economy.
C) shows why small shifts in investment have a powerful influence on national income.
D) illustrates why a small change in income causes a large change in saving.

Question

Quizplus · Accepted Answer

The multiplier principle shows how a small initial change in investment can lead to a larger increase in national income. This is important because it implies that government or private sector investment can have a stabilizing effect on the economy by boosting aggregate demand and creating jobs. The other options are incorrect. While the multiplier principle was important before Keynes, it remains relevant today. Investment does not necessarily lead to stabilization without proper macroeconomic policies in place. Lastly, the multiplier principle does not illustrate why a small change in income leads to a large change in saving.

The Multiplier Principle Is Important Because It