Which of the following best describes the multiplier?
Answer Details
The multiplier is the ratio of change in income to the expenditure that brought it about. In other words, it is the amount by which an initial change in expenditure, such as an increase in government spending or investment, will increase the total income in an economy. The multiplier effect occurs when the initial change in spending leads to an increase in income, which in turn leads to additional spending and further increases in income. The size of the multiplier depends on the marginal propensity to consume, which is the fraction of additional income that is spent on consumption. The higher the marginal propensity to consume, the larger the multiplier will be.