Suppose the multiplier is 2 and the short- run aggregate supply curve is positively sloped.Investment increases by $10 billion.In the short run, equilibrium real GDP
A)does not change.
B)increases by less than $20 billion.
C)increases by more than $20 billion.
D)decreases by less than $20 billion.
E)increases by $20 billion.

Question

Quizplus · Accepted Answer

With a multiplier of 2, an increase in investment of $10 billion would lead to an increase in equilibrium real GDP of $20 billion in the long run. However, in the short run, the short-run aggregate supply curve is positively sloped, meaning that as output increases, the price level also increases. This means that the increase in investment will lead to a partial increase in output, but also an increase in prices, which will decrease the purchasing power of consumers and reduce consumption. As a result, the increase in equilibrium real GDP will be less than $20 billion.

Suppose the Multiplier Is 2 and the Short- Run Aggregate