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

Question

BlackTom AI · Accepted Answer

The spending multiplier effect explains how an initial change in autonomous spending can generate a larger total change in real GDP.

1) Relevant concepts:
- Marginal Propensity to Consume (MPC): the fraction of additional income households spend.
- Spending (or Keynesian) multiplier: total change in GDP = initial injection × 1/(1 − MPC) in a simple closed economy without taxes or imports.
- Geometric series: successive rounds of spending form a diminishing infinite series.

2) Step-by-step reasoning:
- Government injects $1,000,000 into the economy. Recipients of that income spend a portion (MPC) and save the rest.
- In round 1 the additional spending is $1,000,000.
- In round 2 recipients spend MPC × $1,000,000.
- In round 3 spending is MPC^2 × $1,000,000, and so on.

3) Calculation (showing intermediate steps):
- Total change in GDP = $1,000,000 × [1 + MPC + MPC^2 + MPC^3 + ...].
- Sum of the infinite geometric series = $1,000,000 × 1/(1 − MPC).
- Example: if MPC = 0.8, multiplier = 1/(1 − 0.8) = 5, so total GDP increase = $1,000,000 × 5 = $5,000,000.
- The intermediate spending rounds would be: 1,000,000; 800,000; 640,000; 512,000; ... summing to 5,000,000.

4) Why the correct answer is correct:
- The multiplier mechanism shows that the initial injection circulates through repeated rounds of consumption, producing a cumulative GDP change larger than the initial injection.

5) Why other options are incorrect:
- b. Higher unemployment: an increase in government spending tends to reduce unemployment (if resources are available), not cause a larger GDP rise.
- c. Lower inflation: lower inflation is unrelated to why GDP rises by more than the injection; inflation is a price-level effect, not the multiplier mechanism.
- d. Higher inflation: while higher spending can exert upward pressure on prices in full-employment conditions, it is not the theoretical reason an initial $1m leads to a greater increase in real GDP.

Conclusion: The correct answer is a. the spending multiplier effect. This matches the provided answer.

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单项选择题

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