Suppose an initial increase in government expenditure increases output by $50,000.If the size of the multiplier is 2.5,the size of the initial increase in government expenditure was:
A)$25,000.
B)$20,000.
C)$12,5000.
D)$1250.
E)$30,000.

Question

Quizplus · Accepted Answer

The formula for calculating the size of the multiplier is: 
Multiplier = Change in output / Change in government expenditure

We know that the multiplier is 2.5 and the change in output is $50,000. So, we can rearrange the formula to solve for the change in government expenditure:

Change in government expenditure = Change in output / Multiplier 
Change in government expenditure = $50,000 / 2.5 
Change in government expenditure = $20,000

Therefore, the initial increase in government expenditure was $20,000. Choice (B) is the correct answer.

Suppose an Initial Increase in Government Expenditure Increases Output by $50,000.If