Suppose that in a particular economy, the multiplier is equal to 5. In terms of aggregate demand and aggregate supply, this value for the multiplier means that after an increase in investment
A) at each level of real GDP, the aggregate demand curve shifts upward by an amount equal to 5 times the change in investment.
B) at each level of real GDP, the aggregate supply curve shifts upward by an amount equal to 5 times the change in investment.
C) at each price level, the aggregate supply curve shifts rightward by an amount equal to 5 times the change in investment.
D) at each price level, the aggregate demand curve shifts rightward by an amount equal to 5 times the change in investment.

Question

Quizplus · Accepted Answer

The multiplier effect indicates how an initial change in spending (such as an increase in investment) leads to a larger change in income and hence aggregate demand. A multiplier of 5 means that for every dollar increase in investment, aggregate demand increases by five dollars, which is represented by a rightward shift in the aggregate demand curve.

Suppose That in a Particular Economy, the Multiplier Is Equal