In theory, an initial injection of spending of $1 million by a government can result in an increase in real Gross Domestic Product (GDP) greater than $1 million due to

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The question asks: In theory, an initial injection of spending of $1 million by a government can result in an increase in real GDP greater than $1 million due to

- Since the answer options are not provided in the prompt, I cannot analyze each specific choice. However, I can explain the core concept that typically justifies a GDP increase that exceeds the initial spending: the spending multiplier effect.

- The spending multiplier effect arises because initial government spending becomes income for someone, who then may spend a portion of that income, creating more income for others, who in turn spend a portion of what they receive, and so on. Each round of spending generates additional GDP beyond the initial $1 million. The size of this effect depends on the marginal propensity to consume (MPC) in the economy: the fraction of additional income that households spend on consumption.

- A simple intuition for why GDP can rise by more than $1 million is that not all of the $1 million is saved or leaked out of the spending stream. If MPC is substantial and there are idle resources (a recessionary gap), the economy can respond with a larger total increase in aggregate demand and output as the rounds of re-spending propagate through the economy.

- Key supporting concepts include: the spending multiplier (often expressed as 1 / (1 - MPC) in a basic model), the idea that some spending leaks (to taxes, saving, imports), and the possibility of crowding in or out depending on the context. If the economy is already at or near full capacity, the multiplier can be smaller or even negative due to rising prices and bottlenecks; if there are idle resources, the multiplier tends to be larger.

- Potential counterpoints to this idea include the possibility of crowding out (where public spending displaces or reduces private spending) and the role of financing debt (if spending is funded by borrowing, it can affect interest rates and private investment). These nuances mean the multiplier is not a fixed number and depends on the broader macroeconomic environment.

- If you had the actual options, I would map each one to these concepts: whether it invokes the multiplier mechanism, whether it acknowledges leakage through saving and imports, whether it considers capacity constraints, and whether it ignores factors that could dampen the effect (like crowding out or financing considerations).

- In short, the central idea behind the statement is that government spending can propagate through the economy via successive rounds of spending, leading to a total GDP increase that exceeds the initial $1 million, provided there are idle resources and a nontrivial marginal propensity to consume. This is the essence of the spending multiplier concept.

In theory, an initial injection of spending of $1 million by a government can result in an increase in real Gross Domestic Product (GDP) greater than $1 million due to

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Similar Questions

An initial increase in government spending of $100 billion can create more than $100 billion of spending throughout the economy by what economists call the __________ effect.

35. Refer to the figure. If the aggregate demand curve shifts from AD2 to AD1, the multiplier effect on real GDP will be a decrease from A. Q3 to Q1. B. Q2 to Q4. C. Q2 to Q1. D. Q3 to Q4.

55. If households in the economy save more of any extra income that they earn, then the multiplier effect will A. increase. B. decrease. C. be unaffected. D. become less than 1.0.

An increase in the MPC

Assume that MPC is the one you calculated in Question 5. Transfer payments increase by 40,000.00 units. As a result, the real GDP will change by [Fill in the blank], units.

Suppose the marginal propensity to consume is 0.75. If businesses become more optimistic about the future and raise their investment by $10, the short-run equilibrium output will _____ and consumption will _.

As contrasted to the mainstream view, Keynesian economists believe that ________ than mainstream economists believe.

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In theory, an initial injection of spending of $1 million by a government can result in an increase in real Gross Domestic Product (GDP) greater than $1 million due to

View Explanation

Log in for full answers

Similar Questions

An initial increase in government spending of $100 billion can create more than $100 billion of spending throughout the economy by what economists call the __________ effect.

35. Refer to the figure. If the aggregate demand curve shifts from AD2 to AD1, the multiplier effect on real GDP will be a decrease from A. Q3 to Q1. B. Q2 to Q4. C. Q2 to Q1. D. Q3 to Q4.

55. If households in the economy save more of any extra income that they earn, then the multiplier effect will A. increase. B. decrease. C. be unaffected. D. become less than 1.0.

An increase in the MPC

Assume that MPC is the one you calculated in Question 5. Transfer payments increase by 40,000.00 units. As a result, the real GDP will change by [Fill in the blank], units.

Suppose the marginal propensity to consume is 0.75. If businesses become more optimistic about the future and raise their investment by $10, the short-run equilibrium output will _____________________ and consumption will _________________.

As contrasted to the mainstream view, Keynesian economists believe that ________ than mainstream economists believe.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Suppose the marginal propensity to consume is 0.75. If businesses become more optimistic about the future and raise their investment by $10, the short-run equilibrium output will _____ and consumption will _.