When the government increases spending, a multiplier effect will:
A)cause a movement to the left along the same AD curve.
B)cause a movement to the right along the same AD curve.
C)shift the AD curve further to the left than the effect of the spending.
D)shift the AD curve further to the right than the effect of the spending.

Question

Quizplus · Accepted Answer

When the government increases spending, it creates a ripple effect in the economy known as the multiplier effect. This effect occurs because the initial injection of spending leads to increased income, which in turn leads to increased consumption and investment. As a result, the total increase in demand and output is greater than the initial increase in government spending. This leads to a shift in the aggregate demand (AD) curve to the right, indicating an increase in the overall level of output and income in the economy. Therefore, the correct answer is that the multiplier effect will cause a shift of the AD curve further to the right than the effect of the spending.

When the Government Increases Spending, a Multiplier Effect Will