What is a multiplier? How does the multiplier effect occur?
What will be an ideal response?
The multiplier is the ratio of the change in equilibrium GDP (Y) divided by the original change in spending that causes the change in GDP.The multiplier effect occurs because one person’s additional expenditure constitutes a new source of income for another person, and this additional income leads to still more spending, and so on.
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Looking at historical evidence for the United States and other countries, which of the following are TRUE?
I. There is a correlation between the growth rate of the quantity theory of money and the growth rate of real GDP. II. There is a correlation between the growth rate of the quantity theory of money and the inflation rate. A) Only I is true. B) Only II is true. C) Both I and II are true. D) Neither I or II is true.
When the price level increases people:
A. demand a smaller quantity of goods and services in the aggregate. B. feel more wealthy. C. have the same real value of assets, regardless of the change in the price level. D. want to spend more, but can’t due to the prices of all goods and services going up.