The aggregate demand curve shifts by an amount greater than an initial change in government spending. This is caused by Blank______.

Question

Multiple choice question.

the money multiplier

the multiplier effect

the marginal propensity to consume

the average propensity to consume

Answer 1

The correct answer is the multiplier effect.

The multiplier effect refers to the process in which an initial change in spending (such as government spending) leads to a larger overall increase in aggregate demand due to the subsequent rounds of spending that it generates in the economy.