Question

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

A. the crowding-out effect.
B. the Fisher effect.
C. the multiplier effect.
D. the wealth effect.

Answer 1

The correct answer is option C.

Step-by-step explanation:

The government builds a water-treatment plant. Workers are hired to build the plant. These workers earn factor incomes. These incomes are spent on buying goods and services. This further increases output level.

This increase in the output level or aggregate demand because of an increase in government spending represents the multiplier effect. Here an increase in the government will cause a more than proportionate increase in output because of the multiplier effect.