Question

The size of the multiplier associated with an initial increase in spending will be Multiple Choice enhanced if inflation occurs. zero if any increase in the price level occurs. the same whether or not inflation occurs. diminished if inflation occurs.

Answer 1

Answer:

The answer for the given question would be the last option given in the answer choice or diminished if inflation occurs.

Explanation:

• The multiplier effect of an increased overall spending in the economy refers to the additional or extended impact of increased aggregate spending on the economy through sequential changes or modifications of the GDP or overall output level.
• An initial increase in spending, including both aggregate consumer spending and government spending or expenditure would collectively lead to an increase in the GDP or National Income of the country, considering the expenditure method of GDP estimation or calculation.
• Now, as the GDP or National Income rises due to increased overall spending,it will further encourage consumers to increase spending considering an increase in the National Income or GDP level as the consumer demand for goods and services in the economy will increase.A higher consumer demand would induce the firms or companies to increase production of goods and services in the economy which would lead to higher private business or capital investments as well. Therefore, the GDP or National Income will increase again or further due to the subsequent or secondary rise in aggregate consumer spending and the private business investment.
• However, if inflation occurs or the overall price level of all the goods and services increases in the economy,then it will prevent the subsequent increase in consumer demand for goods and services in the economy due to initial increase in National Income,thereby,preventing the secondary rise in the consumption spending or expenditure.
• Hence,the entire multiplier effect of the initial rise in the overall spending in the economy could be jeopardized by a simultaneous inflation in the economy.