When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of

Question

a. the multiplier effect.
b. the investment accelerator.
c. the crowding-out effect.
d. supply-side economics.
e. none of the above.

Answer 1

The correct answer is a. the multiplier effect.

The multiplier effect refers to the phenomenon where an initial increase in spending (in this case, government purchases) leads to a larger overall increase in income and economic activity as recipients of that spending go on to spend part of their income, further stimulating the economy.