Question : The multiplier effect refers to the:
Option 1: Increase in consumption due to an increase in income
Option 2: Increase in investment due to an increase in consumption
Option 3: Increase in income due to an increase in investment
Option 4: Increase in income due to an initial change in spending
Correct Answer: Increase in income due to an initial change in spending
Solution : The correct answer is (d) Increase in income due to an initial change in spending
The multiplier effect is a concept in macroeconomics that explains how an initial change in spending can lead to a larger change in national income. When there is an increase in autonomous spending (such as government spending, investment, or consumption), it stimulates economic activity and generates additional rounds of spending.
The multiplier effect occurs because the increase in spending by one individual or sector becomes income for another individual or sector, who in turn spends a portion of that income. This process continues as the additional income earned from each round of spending leads to further increases in consumption, investment, and overall economic activity.
