The simple multiplier formula assumes the following, except:
A) The economy has excess capacity and room to expand output
B) Firms will raise prices as buyers buy more of their output
C) People will spend more if they earn additional income
D) Business firms will increase production if demand for their output increases

Question

Quizplus · Accepted Answer

The simple multiplier formula assumes that the economy has excess capacity and room to expand output, people will spend more if they earn additional income, and business firms will increase production if demand for their output increases. However, the assumption that firms will raise prices as buyers buy more of their output is not included in the formula. The formula assumes that the increase in demand will be met by an increase in supply without affecting the price level.

The Simple Multiplier Formula Assumes the Following, Except