Suppose aggregate output is demand- determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The simple multiplier is equal to
A)0.6.
B)0.4.
C)- 0.6.
D)- 2.5.
E)2.5.

Question

Quizplus · Accepted Answer

The simple multiplier is equal to the change in equilibrium national income divided by the initial change in autonomous expenditure. From the information given, the initial change in autonomous investment expenditure is $20 million and the resulting change in equilibrium national income is -$50 million. Therefore, the simple multiplier is:
Multiplier = change in equilibrium national income / initial change in autonomous expenditure
Multiplier = -$50 million / $20 million
Multiplier = -2.5
Note that the answer is negative because the decrease in autonomous investment expenditure led to a decrease in equilibrium national income.

Suppose Aggregate Output Is Demand- Determined