Inflation tends to:
A) Increase productivity
B) Decrease input prices
C) Increase the strength of the multiplier
D) Reduce the strength of the multiplier

Question

Quizplus · Accepted Answer

Inflation reduces the strength of the multiplier. The multiplier effect is the idea that an initial increase in spending will lead to a larger increase in total spending in the economy. However, inflation can cause prices to rise, which reduces the purchasing power of consumers and decreases the overall value of money. As a result, the multiplier effect becomes weaker because the increase in spending does not lead to as significant of an increase in overall economic activity.

Inflation Tends To