ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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T
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F
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Either A or B
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None of the above
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Detailed explanation-1: -If the leakages are relatively small, then each successive round of the multiplier effect will have larger amounts of demand, and the multiplier will be high.
Detailed explanation-2: -Consequently consumption demand increases, and firms then produce to meet this demand. Thus the national income and product rises by more than the increase in investment. The multiplier effect is greater than one. ⇒ demand up ⇒ product up ⇒ income up ⇒ demand up ⇒ etc.
Detailed explanation-3: -The incomes used for paying back the debts do not get spent on consumer goods and services and therefore leak away from the income stream. This reduces the size of the multiplier.
Detailed explanation-4: -The size of the multiplier depends on the percentage of deposits that banks are required to hold as reserves. When the reserve requirement decreases, the money supply reserve multiplier increases, and vice versa.