The multiplier effect arises because
A)the IS curve is downward sloping.
B)the LM curve is upward sloping.
C)prices are flexible.
D)the initial increase in government purchases increases the number of transactions over time.

Question

Quizplus · Accepted Answer

The multiplier effect arises due to the initial increase in government purchases that increases the number of transactions and expenditure. As a result, the increased expenditure leads to further rounds of spending, which creates a chain reaction and ultimately results in a larger increase in GDP than the initial government purchase increase. In other words, the multiplier effect is the process by which an initial increase in expenditure results in a larger final increase in GDP.

The Multiplier Effect Arises Because