Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending? A. Through the government purchases multiplier, the $1 increase in government spending will lead to a decrease in aggregate demand and national income, which will lead to an increase in induced spending. B. Through the government purchases multiplier, the $1 increase in government spending will lead to a decrease in aggregate demand and national income, which will lead to a decrease in induced spending. C. Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to a decrease in induced spending. D. Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.

Question

24-03-2020
Business

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Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending? A. Through the government purchases multiplier, the $1 increase in government spending will lead to a decrease in aggregate demand and national income, which will lead to an increase in induced spending. B. Through the government purchases multiplier, the $1 increase in government spending will lead to a decrease in aggregate demand and national income, which will lead to a decrease in induced spending. C. Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to a decrease in induced spending. D. Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.

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Answer:

D. Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.

Explanation:

We know,

Multiplier = Changing real equilibrium GDP ÷Change of government spending.

If we increase the multiplier, government spending will lead to an increase in aggregate demand that is potential GDP is higher than actual GDP and national income, which will lead to an increase in induced spending. Therefore option D is the correct answer as options A, B, and C do not meet the requirements.