If the spending multiplier is greater than 1.0,a $200 billion increase in autonomous investment will cause:
A)equilibrium investment to increase by less than $200 billion.
B)equilibrium investment to decrease by more than $200 billion.
C)equilibrium real GDP demanded to increase by more than $200 billion.
D)equilibrium real GDP demanded to decrease by less than $200 billion.
E)equilibrium saving to decrease by more than $200 billion.

Question

Quizplus · Accepted Answer

If the spending multiplier is greater than 1.0, then an increase in autonomous investment will lead to a larger increase in equilibrium real GDP demanded. Using the formula for the spending multiplier (1/(1-MPC)) assuming a MPC of 0.75, the spending multiplier would be 4. Thus, a $200 billion increase in autonomous investment would result in a $800 billion increase in equilibrium real GDP demanded (200*4).

If the Spending Multiplier Is Greater Than 1