The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

Question

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The multiplier effect describes how an initial increase in spending (such as the construction of a new water-treatment plant and the subsequent payment to workers) leads to further increases in spending (workers spending their earnings), which amplifies the initial impact on the economy.

The Government Builds a New Water-Treatment Plant