The multiplier definition.

• A. The ratio of exports to GDP
• B. The long-run potential growth rate
• C. The level of inflation when spending increases
• D. The factor by which new injections into the economy increase growth each time its spent/respent

Answer: (D)

The multiplier measures how much total national income rises from an initial injection of spending, because the money keeps circulating and is respent. Each round of spending generates more income for someone who then spends part of it, so the total rise in GDP is larger than the original amount. Some of the money leaks away as saving, taxes, or imports, so each successive round is smaller, and the total change in GDP is the sum of a geometric series. In the simple model, the size of the multiplier depends on marginal propensity to consume; for example, if MPC is 0.75, the multiplier is 1/(1−0.75) = 4, meaning a £100 injection could raise GDP by £400 in total, given other assumptions hold. This is precisely the idea described: the factor by which new injections into the economy increase growth each time it is spent or respent.