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:

U.S. Output

The total economic production of goods and services by the United States.

Proprietary Income

Income derived from the ownership of a business entity or patent.

General Sales Taxes

Taxes applied broadly on sales of goods and services, typically calculated as a percentage of the sale price.

Corporate Income Taxes

Taxes imposed on the net income of corporations.