Suppose that the government spending multiplier is 3.2 and the tax multiplier is 2.9.This means that,if prices are constant,a $200 billion rise in government spending will __________________,and a $200 billion cut in taxes will _____________________.

Question

Quizplus · Accepted Answer

The government spending multiplier of 3.2 means that for every $1 increase in government spending, Real GDP will increase by $3.2. Therefore, a $200 billion rise in government spending will lead to a $200 billion x 3.2 = $640 billion increase in Real GDP.

Similarly, the tax multiplier of 2.9 means that for every $1 decrease in taxes, Real GDP will decrease by $2.9. Therefore, a $200 billion cut in taxes will lead to a $200 billion x 2.9 = $580 billion decrease in Real GDP. However, the question asks for the increase/decrease in Real GDP, so we need to use the positive value of the multipliers.

Suppose That the Government Spending Multiplier Is 3