Question 20
The multiplier principle is important because it
(1) was central to economic theory before Keynes.
(2) shows why small shifts in investment have a powerful influence on national income.
(3) implies that investment will help stabilize the economy.
(4) illustrates why a small change in income causes a large change in saving.

The multiplier principle burst onto the economic scene thanks to the brilliant mind of John Maynard Keynes during the Great Depression. He introduced it to explain how an initial change in spending can magnify effects throughout the economy, illustrating the ripple effect that investment can create—turning small cash injections into big economic booms!

When you’re thinking about the multiplier, it’s like the ultimate domino effect. If someone decides to invest a bit of money into a local bakery, not only does the bakery benefit from increased sales, but the baker might then hire staff or buy more ingredients, leading to further spending in other businesses. So, a little investment can lead to a lot of economic activity, making it a powerful tool in stabilizing an economy!