Economics • Economic BasicsMedium
What does the 'Multiplier Effect' in macroeconomics signify?
A. An initial change in aggregate spending causes a larger change in overall national income.✓ Correct Answer
B. An increase in tax rates results in a proportional reduction in consumer debt.
C. Rising money supply triggers hyperinflation at an exponential rate.
D. Higher production efficiency lowers the marginal cost of labor.
💡 Solution & Explanation
The multiplier effect in Keynesian economics demonstrates that an independent injection of aggregate spending generates a cumulative increase in national income that exceeds the initial injection. This magnification occurs because spending becomes income for others, who subsequently re-spend a portion of it based on their marginal propensity to consume. Alternative options incorrectly describe concepts related to tax incidence, hyperinflationary monetary expansion, or microeconomic production theory.
More Economics Economic Basics questions
- In the study of consumer behavior, what term describes a good for which demand increases as consumer income…
- In macroeconomics, how does the unique demographic and geographic profile of Arunachal Pradesh influence the…
- What economic phenomenon does the Kuznets Curve hypothesize regarding income inequality during economic…
- In macroeconomic theory, how is the 'Marginal Propensity to Consume' (MPC) formally defined?
- In macroeconomic theory, what does the 'IS-LM' model jointly determine?