Final answer:
The spending multiplier determines the total impact on spending from an initial change in aggregate demand, amplifying the initial expenditure through subsequent rounds of spending, with leakages reducing the impact over time. The correct answer to the student's question is: B, a formula to determine the total impact on spending from an initial change of a given amount.
Step-by-step explanation:
The spending multiplier is a concept in economics that refers to the total impact on spending from an initial change of a given amount. This effect explains how an initial change in aggregate demand can produce a cumulative increase in overall GDP that is several times the size of the initial amount spent. The formula for the multiplier shows how the original expenditure is amplified through subsequent rounds of spending in the economy, taking into account the leakages to savings, taxes, and imports. For example, if the government spends an additional $100, this could lead to an increased aggregate expenditure of more than $100 because individuals who receive the initial $100 as income will spend a portion of it, which in turn becomes income for others, and so on. The process continues through several rounds, each time with a diminishing impact, until the total additional expenditure, and thus GDP, is much larger than the initial expenditure.