Understanding the Multiplier Effect

What is the multiplier effect in economics?

• A theory about consumer behavior

• A method to calculate interest rates

• A concept explaining the greater final impact on national income from an initial change in aggregate demand

• A measure of inflation

How is the multiplier coefficient calculated?

• Final change in real GDP + Initial change in AD

• Initial change in AD - Final change in real GDP

• Final change in real GDP / Initial change in AD

• Initial change in AD / Final change in real GDP

Which of the following is an example of an initial injection into the circular flow?

• A reduction in government spending

• A decrease in consumer savings

• A rise in exports

• An increase in taxes

What happens during a negative multiplier effect?

• An initial withdrawal leads to a smaller drop in GDP

• An initial injection leads to a larger increase in GDP

• An initial withdrawal leads to a larger drop in GDP

• An initial injection has no effect on GDP

Which of the following is NOT a factor that can cause an initial injection?

• Consumer savings

• Exports

• Investment

• Government spending

What is the effect of one agent’s spending in the multiplier effect?

• It reduces aggregate demand

• It leads to inflation

• It becomes another agent’s income

• It decreases the national income

Which of the following best describes the circular flow of income?

• The flow of money between banks and the government

• The flow of goods and services in the economy

• The flow of income and spending between different sectors of the economy

• The flow of imports and exports

What is the impact of a £5 billion increase in government spending if the multiplier is 2.4?

• A £5 billion increase in real GDP

• A £12 billion increase in real GDP

• A £2.4 billion increase in real GDP

• A £7.4 billion increase in real GDP

Which of the following is a potential outcome of the multiplier effect?

• A greater final increase in real national income

• A stabilization of prices

• A reduction in employment

• A decrease in national income

What is the role of government spending in the multiplier effect?

• It reduces the multiplier coefficient

• It acts as an injection into the circular flow

• It has no impact on the circular flow

• It acts as a withdrawal from the circular flow