The Multiplier Effect

question 176

Multiple Choice

The multiplier effect

• A) tells us nothing about how increases in investment spending affect GDP
• B) tells us that a change in investment spending changes equilibrium GDP by more than the change in investment
• C) works only for increases in investment
• D) is relevant only in situations where the marginal propensity to consume cannot be determined
• E) is relevant only in situations in which the MPC is between 0.5 and 0.7.

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Definitions:

Price Elasticity

The measure of how much the quantity demanded or supplied of a good changes in response to a change in its price.

Price Doubles

A situation where the price of a good, service, or commodity increases to twice its previous level, affecting supply and demand dynamics.

Intensive Margin

The degree to which factors of production, such as labor, are utilized more intensely to increase output in the short term.

Consumption Changes

Variations in the amount and types of goods and services used by households over time.