Paper 2 · November 2019 · Costs and Revenue
The multiplier effect describes the way in which
Aan increase in spending on imports leads to a fall in national income of the same size
Ba rise in the rate of interest reduces planned investment by a strictly proportionate amount
Can initial injection of spending leads to a larger eventual rise in national income
Da rise in the general price level leads to an equal rise in money wages across the economy
Explanation
An injection into the circular flow becomes income for the households and firms that receive it, and they spend part of that income again, which becomes income for others. Each round is smaller than the last, but the total rise in national income is a multiple of the original injection.
Derived from ZIMSEC Economics 6073/2 Paper 2, November 2019, Q1