In the context of introductory economics, what does the multiplier represent?

• A. The rate at which prices increase over time.
• B. The percentage of income that households save.
• C. The total value of goods and services produced in an economy.
• D. The amount by which a \$1 change in reserves will change the money supply.

Answer: (D)

Verified step by step guidance

1. Understand that the multiplier in economics typically refers to the money multiplier, which explains how an initial change in reserves leads to a larger change in the overall money supply.
2. Recall that banks keep a fraction of deposits as reserves and lend out the rest, which then gets redeposited and lent out again, creating a multiplied effect on the money supply.
3. Express the money multiplier formula as \(\text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}}\), where the reserve ratio is the fraction of deposits banks hold as reserves.
4. Recognize that a \$1 change in reserves can lead to a change in the money supply equal to \$1$ multiplied by the money multiplier, showing the total impact on the economy's money supply.
5. Conclude that the multiplier represents the amount by which a \$1 change in reserves will change the money supply, not the rate of price increase, savings rate, or total production.