The multiplier effect suggests that:
A) spending $1 increases GDP by more than $1.
B) spending $1 increases GDP by less than $1.
C) saving $1 increases GDP by more than $1.
D) spending $1 decreases GDP by more than $1.

Question

Quizplus · Accepted Answer

The multiplier effect suggests that an initial increase in spending (such as government spending or consumer spending) will lead to a larger increase in overall economic activity. This is because the additional spending leads to increased income for those who receive it, which they can then spend themselves, leading to even more income and spending. This process continues in a chain reaction, resulting in a larger overall increase in GDP (gross domestic product) than the initial increase in spending. Therefore, spending $1 can increase GDP by more than $1.

The Multiplier Effect Suggests That