In an economy, the government expenditure 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 government expenditure multiplier measures the overall effect of an increase in government expenditure on the economy. In this case, the multiplier is 3, meaning that for every $1 increase in government expenditure, real GDP will increase by $3 in the short run. However, the increase in the price level will be less than the increase in real GDP, meaning that the answer cannot be A or D. Thus, the correct answer is B: the price level will rise, but by less than the increase in real GDP.

In an Economy, the Government Expenditure Multiplier Is 3