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:

United States

A country in North America consisting of 50 states, a federal district, five major self-governing territories, and various possessions.

Sales Taxes

Taxes imposed by governments on sales of goods and services, typically calculated as a percentage of the sale price.

Digressive

Relating to or denoting a method that reduces in pace or intensity over time or steps, often used in taxation to describe tax rates that increase less proportionally with the amount subject to tax.

Regressive

Pertaining to a tax system where the tax rate decreases as the taxable amount increases, disproportionately affecting lower-income individuals.