Everything else the same, if government expenditure increases by $400 billion and imports increase by $400 billion, then GDP
A) decreases by $400 billion.
B) decreases by $200 billion.
C) increases by $400 billion.
D) does not change.
E) increases by $200 billion.

Question

Quizplus · Accepted Answer

An increase in government expenditure directly increases GDP by the amount of the expenditure, while an increase in imports decreases GDP by the amount of the imports, since imports are subtracted in the calculation of GDP. Therefore, if both increase by the same amount, their effects on GDP cancel each other out, resulting in no change to GDP.

Everything Else the Same, If Government Expenditure Increases by $400