What is the multiplier effect in economics?

The multiplier effect in economics refers to the concept that an initial change in spending leads to a more significant overall impact on national income and economic activity. When there is an injection of spending—such as government expenditure, investment, or consumer spending—it triggers additional rounds of spending as recipients of that income will, in turn, spend a portion of it. This process continues, with each subsequent round of spending being smaller than the last, but cumulatively contributing to a larger total increase in income.

For instance, if the government invests in infrastructure, the workers and companies directly involved benefit and spend that income, which then supports other businesses. This chain reaction can significantly amplify the effects of the initial spending. The magnitude of the multiplier depends on factors such as the marginal propensity to consume and the degree of leakage (like savings or imports).

In contrast, the other options do not accurately describe the multiplier effect. Decreased government spending, reduced tax rates, and the impact of increased imports focus on different aspects of economic activity rather than the amplification of income from an initial spending boost. Therefore, the definition encapsulated in the correct choice accurately reflects the essence of the multiplier effect.