Question

The multiplier effect occurs because a. the level of national income must be multiplied by the...

The multiplier effect occurs because

a. the level of national income must be multiplied by the average propensity to consume to find total consumption spending.

b. what business firms view as spending is viewed by households as income, so that new investment automatically becomes new income.

c. the new income generated by an increase in aggregate demand will be spent, each time becoming new income again.

d. when national income rises, the MPC increases, prompting further increases in income.

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Answer #1

Answer

Option c) is correct. The new income generated by an increase in aggregate demand will be spent, each time becoming new income again.

Reason:

Every time there is an injection of new demand into the circular flow of income there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending.

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