Which of the following helps explain the multiplier effect?
A) Income is spent and re-spent in the circular flow model.
B) People buy a lot of luxury items.
C) Incomes tend to increase with inflation.
D) Banks only hold a fraction of their deposits on reserve.

Question

Quizplus · Accepted Answer

The multiplier effect refers to the idea that an initial injection of spending into the economy can lead to a larger increase in overall economic activity, as that spending becomes income for others, who in turn spend that income, creating a ripple effect throughout the economy. This phenomenon is possible because income is spent and re-spent in the circular flow model.

Which of the Following Helps Explain the Multiplier Effect