The multiplier helps explain
A) why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.
B) why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.
C) why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.
D) why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.

Question

Quizplus · Accepted Answer

The multiplier effect indicates that a change in one component of GDP (such as government spending) will lead to a larger change in real GDP due to subsequent rounds of spending and income generation. As a result, a rise in government spending would have a magnified effect on real GDP, causing it to rise by more than the amount of the increase in government spending.

The Multiplier Helps Explain