What does the multiplier effect quantify?

What does the multiplier effect quantify?

• A. The proportion of GDP that is tax revenue.
• B. The rate of inflation caused by a change in money supply.
• C. The ratio of total change in real GDP caused by autonomous change in aggregate spending to the size of the change.
• D. The ratio of price level to quantity demanded.

Answer: (C)

The multiplier measures how a change in autonomous spending propagates through the economy, amplifying the initial impact on real GDP. It is the ratio of the total change in real GDP to the size of the autonomous spending change. When autonomous spending rises, recipients spend a portion of that income, which becomes someone else’s income and is spent again, creating a chain that adds up to a larger overall GDP change. For example, if the marginal propensity to consume is 0.8 and autonomous spending increases by 100, the total rise in real GDP is 100 / (1 - 0.8) = 500, so the multiplier is 5. The other concepts described—tax revenue as a share of GDP, inflation from money supply changes, or the price level relative to quantity demanded—do not describe this amplification of GDP from an initial spending change.

The multiplier measures how a change in autonomous spending propagates through the economy, amplifying the initial impact on real GDP. It is the ratio of the total change in real GDP to the size of the autonomous spending change. When autonomous spending rises, recipients spend a portion of that income, which becomes someone else’s income and is spent again, creating a chain that adds up to a larger overall GDP change. For example, if the marginal propensity to consume is 0.8 and autonomous spending increases by 100, the total rise in real GDP is 100 / (1 - 0.8) = 500, so the multiplier is 5. The other concepts described—tax revenue as a share of GDP, inflation from money supply changes, or the price level relative to quantity demanded—do not describe this amplification of GDP from an initial spending change.