An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the

Question

Multiple Choice
net export effect.
wealth effect.
real-balances effect.
multiplier effect.

Answer 1

The correct answer is multiplier effect.

The multiplier effect refers to the phenomenon where an initial change in spending (such as an increase or decrease in consumer spending, investment, government spending, or net exports) leads to a larger overall change in aggregate demand. This happens because the initial spending creates income for others, who then spend a portion of that income, further increasing aggregate demand, and so on. As a result, the shift in the aggregate demand curve can be more pronounced than the initial change in spending itself.