One year, the government of Econia chooses to spend an additional $20 million on worker salaries to build new playgrounds. The playground workers spend a significant part of their salaries on consumer goods. The vendors that they buy from then have higher profits and spending power. GDP eventually rises by $28 million, which is $8 million more than the increase in government spending. Economists call this phenomenon the _____ effect.

Question

Quizplus · Accepted Answer

The multiplier effect describes how an initial increase in spending (in this case, government spending on worker salaries) leads to a larger increase in the overall GDP due to the subsequent rounds of spending by those who receive the initial spending.

One Year, the Government of Econia Chooses to Spend an Additional