Question

1) The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

Question 2 options:

	reduces investment and thereby increases consumer spending.
	increases the money supply and thereby reduces interest rates.
	increases income and thereby increases consumer spending.
	decreases income and thereby increases consumer spending

2) The multiplier effect applies to

Question 3 options:

	changes in taxes.
	changes in government spending.
	neither a nor b.
	both a and b.

Answer 1

Q1). The correct option is (c).

increases income and thereby increases consumer spending.

As we know that multiplier effect is a phenomenon whereby a given change in a particular input, such as government spending, causes a larger change in an output, such as gross domestic product. Multiplier increases the income which in turn has positive effect on consumer spending.

Q2). The correct option is (d).

Both a and b.

As we know that the higher the tax rate, the smaller the amount of any increase in income that households have available to spend, which in turn reduces the size of the multiplier effect.

Although tax multiplier is negative but taxes do have multiplier effect.

Hope you got the answer.

Kindly comment for further explanation.

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