Firms believe that the current economic upturn will be long-lasting and have decided to hold a significant amount of excess labor. The government reports that the unemployment rate is 2.5%. The government has decided it needs to take very little action to stimulate the economy. In this situation the multiplier is likely to be

Question

Quizplus · Accepted Answer

Given the low unemployment rate and firms' optimism about the economy, it's likely that additional government spending would have a limited impact on increasing output, as resources (like labor) are already highly utilized. This scenario suggests a small multiplier effect, as there's less slack in the economy to absorb and multiply the effects of fiscal stimulus.

Firms Believe That the Current Economic Upturn Will Be Long-Lasting