PRC-3 · Chapter 15 · Question 18 of 44
The government attempts to use the multiplier effect to pull the economy out of a recession by building roads. However, there is a severe shortage of cement and steel in the country. What limitation of the multiplier does this expose?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Non-availability of consumer and capital goods to absorb the spending
Explanation
For the multiplier to work, the economy must have spare goods and resources available to buy. If goods are unavailable, the injected money just causes inflation, halting the real multiplier effect.
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