Which of the Following Best Explains the Multiplier Effect as a Result

question 130

Multiple Choice

Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?

• A) To fund the government spending, more money must be printed. The resulting increase in money supply lowers interest rates which in turn stimulates consumption and investment spending.
• B) The initial change in spending will cause an increase in real GDP and it also becomes income to someone else. As a result, the government's tax revenue increases which in turn allows the government to further increase its spending.
• C) The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption.
• D) The initial change in government spending creates a supply of jobs and stimulates production of domestically produced goods and services. The resulting increases in wages and investment demand leads to increased real GDP.

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Definitions:

Debt Restructuring

The process of negotiating and agreeing to new terms for debts with creditors to achieve some reduction in the financial burden.

Equity

The value of an ownership interest in property, including shareholders' equity in a company, which represents assets minus liabilities.

Top Management

The highest level of managers in an organization, including positions like CEO and CFO, responsible for setting strategic goals and company policies.

Board Of Directors

The governing body of a corporation, elected by common stockholders.