The expenditure multiplier is larger than one because
A) an increase in autonomous expenditure induces further increases in aggregate expenditure.
B) additional expenditure induces lower incomes.
C) an increase in autonomous expenditure brings about a reduction in the real interest rate.
D) an increase in autonomous expenditure induces further decreases in aggregate expenditure.
E) the price level rises, thereby reinforcing the initial effect.

Question

Quizplus · Accepted Answer

The expenditure multiplier is larger than one because an increase in autonomous expenditure (such as government spending or investment) induces further increases in aggregate expenditure. This occurs because the initial increase in spending by one entity leads to an increase in income and consumption by others in the economy, leading to a chain reaction of spending and income increases. Therefore, the multiplier effect amplifies the initial impact of the autonomous expenditure on the economy.

The Expenditure Multiplier Is Larger Than One Because