Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to
A) decrease by $50 billion.
B) decrease by $150 billion.
C) remain unchanged since spending on military goods is unproductive and usually wasteful.
D) decrease by $25 billion.

Question

Quizplus · Accepted Answer

The multiplier effect indicates that a change in spending will have a multiplied impact on the equilibrium GDP. With a multiplier of 2, a $25 billion decrease in government expenditures will lead to a $50 billion decrease in equilibrium GDP.

Suppose the Economy's Multiplier Is 2