What mechanism describes how an initial increase in spending leads to a greater total increase in spending?

The mechanism that describes how an initial increase in spending leads to a greater total increase in spending is known as the multiplier effect. This concept illustrates how an initial injection of spending (for example, through government expenditure or consumer spending) can create a ripple effect throughout the economy.

When one entity spends money, it becomes income for another entity, which can then spend a portion of that income on goods and services. This additional spending generates further income for other parties involved in the economy, leading to additional rounds of spending. As a result, the overall increase in economic activity is greater than the original amount of spending.

The multiplier effect is a fundamental concept in Keynesian economics, highlighting the interconnectedness of economic transactions and the potential for initial spending to stimulate broader economic growth. The size of the multiplier depends on factors such as the marginal propensity to consume and the prevailing economic conditions, but its core premise is that money flows through the economy, compounding effects and magnifying the impact of initial expenditures.