Question : The concept of the multiplier effect suggests that an increase in:
Option 1: Investment expenditure leads to a larger increase in real GDP
Option 2: Consumption expenditure leads to a larger increase in real GDP
Option 3: Government expenditure leads to a larger increase in real GDP
Option 4: Net exports leads to a larger increase in real GDP
Correct Answer:
Investment expenditure leads to a larger increase in real GDP
Solution : The correct answer is (a) Investment expenditure leads to a larger increase in real GDP.
The multiplier effect is a key concept in macroeconomics that explains how changes in autonomous expenditures, such as investment, consumption, government expenditure, or net exports, can have a multiplied impact on real GDP.
When there is an increase in investment expenditure, it leads to an initial increase in aggregate demand. This increase in demand stimulates production and income generation in the economy. As a result, the income generated from the initial increase in investment leads to an increase in consumer spending, which further increases aggregate demand. The increased consumer spending then leads to more production and income, creating a cycle of increasing demand and output.
