Question

When the government increases spending by an amount \[\Delta G\], national income rises by a larger amount. This chain reaction is called:

Options

• The substitution effect

• The acceleration effect

• The multiplier effect

• The crowding-out effect

Answer 1

When government increases spending by \[\Delta G\], national income rises by a larger amount, and this chain reaction is called the multiplier effect. It means a change in government spending leads to a multiplied change in equilibrium income, discussed in the context of aggregate demand.