Question : The multiplier effect refers to:
Option 1: The magnification of changes in autonomous expenditure on real GDP
Option 2: The decrease in consumption as income increases
Option 3: The decrease in investment as interest rates rise
Option 4: The increase in government expenditure during a recession
Correct Answer:
The magnification of changes in autonomous expenditure on real GDP
Solution : The correct answer is (a) The magnification of changes in autonomous expenditure on real GDP.
It is a concept in macroeconomics that explains how an initial change in autonomous expenditure, such as government spending or investment, can have a larger impact on overall economic activity. The multiplier effect occurs because when an individual or entity spends money, that money becomes income for someone else, who then spends a portion of it, and so on. This cycle continues, leading to a cumulative increase in overall spending and economic output. The multiplier effect is based on the idea that an injection of spending into the economy creates a ripple effect, stimulating further spending and generating additional income.
