In macroeconomics, the multiplier effect refers to which relationship between an initial change in spending and the resulting change in equilibrium income or GDP?

Introduction / Context:
The multiplier effect is a fundamental concept in Keynesian macroeconomics and in the analysis of fiscal policy. It explains how an initial change in autonomous spending, such as an increase in investment or government expenditure, can lead to a larger overall change in equilibrium income or GDP. This question tests whether you can correctly state what the multiplier effect means and distinguish it from other unrelated relationships in the economy.

Given Data / Assumptions:

• The focus is on the multiplier effect in national income determination.
• Autonomous spending refers to spending that does not depend directly on current income, for example investment, government expenditure, or autonomous consumption.
• Households have a marginal propensity to consume out of additional income.
• The economy is assumed to have idle capacity so that output can increase when demand rises.

Concept / Approach:
The multiplier process begins when there is an initial injection of spending into the economy. For example, if the government spends more on infrastructure, construction firms receive additional income. They in turn pay wages and buy materials, providing income to workers and suppliers. These recipients then spend a portion of their new income on consumption goods, generating further income for others. Because each round of spending is smaller than the previous round due to saving, taxes, and imports, the process forms a converging series. The total change in equilibrium income is therefore multiple times the initial injection, and the ratio of the total change in income to the initial change in spending is called the multiplier.

Step-by-Step Solution:
Step 1: Recall the basic Keynesian identity where equilibrium income is determined by aggregate demand and the spending multiplier.Step 2: Understand that the multiplier effect means an initial autonomous change in spending generates successive rounds of induced consumption.Step 3: As each recipient of new income spends part of it, income for others rises, and this chain reaction continues until leakages such as saving, taxes, and imports stop further rounds.Step 4: The total change in equilibrium GDP is therefore larger than the original change in spending, by a factor equal to the multiplier value, often written in simple models as 1 / (1 − MPC).Step 5: Select the option that explicitly states that a given initial change in autonomous spending leads to a larger total change in equilibrium GDP through repeated rounds of induced consumption.

Verification / Alternative check:
Consider a numerical example. Suppose the marginal propensity to consume is 0.8 and the government increases spending by 100 units of currency. In the first round, income rises by 100. Households then spend 80 of this additional income. In the next round, producers who receive that 80 spend 64, and so on. The sum of this geometric series converges to 100 * (1 / (1 − 0.8)) = 500. Thus a 100 unit initial increase in spending produces a 500 unit risen in equilibrium income. This illustrates the multiplier effect in a simple and concrete way and matches the wording of the correct option.

Why Other Options Are Wrong:
Option B describes a complete crowding out scenario where any change in government spending is exactly cancelled, which contradicts the idea of a positive multiplier. Option C mixes up the multiplier concept with money demand and the effect of price levels. Option D incorrectly claims exports have no effect on income, ignoring the export multiplier. Option E makes an unrealistic statement about the money supply doubling automatically and has nothing to do with the spending multiplier mechanism.

Common Pitfalls:
Many learners remember that there is a multiplier but forget that it refers to the relationship between an initial autonomous change in spending and the larger change in equilibrium income. They sometimes confuse it with any large response in a variable or with unrelated concepts like the money multiplier in banking. To avoid this, always connect the Keynesian multiplier with repeated rounds of induced consumption and the formula total change in income equals multiplier times initial change in autonomous spending.

Final Answer:
The multiplier effect means that a given initial change in autonomous spending leads to a larger total change in equilibrium GDP through repeated rounds of induced consumption.