In an economy, the multiplier is 3. If government expenditure increases by $1 million, then in the short run, the price level _________and real GDP_________ $3 million.

Question

Quizplus · Accepted Answer

The multiplier effect occurs when an initial increase in government expenditure leads to a larger increase in real GDP. In this case, the multiplier is 3, which means that for every $1 increase in government spending, real GDP will increase by $3. Therefore, if government expenditure increases by $1 million, real GDP will increase by $3 million.

However, the price level may also rise in the short run due to increased demand for goods and services. This is because an increase in government spending leads to an increase in disposable income and therefore consumption. With a fixed supply of goods and services, increased demand will lead to a rise in the price level. Therefore, the correct answer is B: rises; increases by less than.

In an Economy, the Multiplier Is 3