In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:
A) increases the amount of money in the economy.
B) changes income, which changes consumption, which further changes income.
C) is government spending and, therefore, more powerful than private spending.
D) changes the interest rate.

Question

Quizplus · Accepted Answer

Fiscal policy in the Keynesian-cross model works through changes in income. An increase in government spending (or decrease in taxes) leads to an increase in income. This increase in income then leads to an increase in consumption, which further increases income. This process continues through multiple rounds, hence the multiplied effect on income.

In the Keynesian-Cross Model, Fiscal Policy Has a Multiplied Effect