Question

What is the key difference between the dynamic multiplier and the static (Keynesian) multiplier?

Options

• The dynamic multiplier assumes income changes instantly

• The dynamic multiplier considers the time lag between changes in investment and changes in income

• The static multiplier includes the effect of time lags

• The dynamic multiplier ignores the role of MPC

Answer 1

The dynamic multiplier considers the time lag between changes in investment and changes in income

Explanation:

The static (Keynesian) multiplier assumes that income changes instantly and completely the moment investment changes. In contrast, the dynamic multiplier accounts for the fact that income adjustment takes place over successive periods, making it more realistic.