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    Question

    In a growing economy, an initial rise in autonomous

    investment leads to an increase in income through repeated consumption spending. The higher income further induces additional investment due to rising demand for capital goods. This combined and magnified impact on national income is referred to as the _____
    A Government expenditure multiplier Correct Answer Incorrect Answer
    B Tax multiplier Correct Answer Incorrect Answer
    C Consumption function effect Correct Answer Incorrect Answer
    D Supermultiplier Correct Answer Incorrect Answer
    E Crowding-out effect Correct Answer Incorrect Answer

    Solution

    The supermultiplier is a dynamic model that combines the Keynesian multiplier (which shows how consumption changes in response to income) with the accelerator principle (which shows how investment changes in response to changes in income), creating a magnified and cumulative effect on national income. Note:

    • Government expenditure multiplier measures the change in income resulting specifically from a change in government spending, not the interaction between autonomous and induced investment.
    • Tax multiplier measures the change in aggregate production caused by changes in taxation, which generally has a smaller impact than spending multipliers because some of a tax cut is saved rather than spent.
    • Consumption function effect is a broad term relating to the relationship between income and consumption, but it does not account for the induced investment (accelerator) component.
    • Crowding-out effect refers to a decrease in private investment that occurs when government borrowing drives up interest rates, which is the opposite of the growth-reinforcing process described. 

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