Final answer:
The correct statement about the multiplier is that reverse causation can complicate its empirical estimation. The multiplier effect shows how an initial spending increase can lead to greater overall economic activity. Economists often debate the exact size of this multiplier. Therefore correct option is B
Step-by-step explanation:
Regarding the multiplier and its impact on fiscal policy, the correct statement is: reverse causation can be a problem when estimating the multiplier empirically. Economists have found that when estimating the multiplier, identifying the precise cause and effect can be challenging, as increases in income can lead to more spending, or more spending can occur in anticipation of higher income. Additionally, expectations about fiscal policy can affect the multiplier's magnitude. If households anticipate that increased government spending will be financed by future tax increases, it might dampen their spending, leading to a lower multiplier. Conversely, if firms are optimistic that the government's fiscal policy will be effective, it may lead to increased investment and a higher multiplier. However, economists often have differing opinions on the exact size of the multiplier.
The expenditure multiplier illustrates that an initial boost in autonomous spending, like government expenditure, leads to a chain of increased income and spending, which in turn affects Gross Domestic Product (GDP) more significantly than the original amount of spending. However, the size of this multiplier is a subject of debate and is influenced by various economic conditions and behaviors.