The diagram shows that a $10 billion increase in government spending leads to a $25 billion increase in real GDP. What explains this larger increase in GDP?
Question 1 Report
The diagram shows that a $10 billion increase in government spending leads to a $25 billion increase in real GDP. What explains this larger increase in GDP?
Answer Details
The multiplier effect occurs when an initial injection of spending leads to a larger final increase in national income. The $10 billion of government spending creates income that is re-spent, generating further rounds of spending and output throughout the economy.
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