If the spending multiplier is equal to 4, then a $25 initial increase in investment spending will lead to a:
A)$25 increase in real GDP.
B)$1 decrease in real GDP.
C)$1 increase in real GDP.
D)$100 decrease in real GDP.
E)$100 increase in real GDP.

Question

Quizplus · Accepted Answer

The spending multiplier effect means that an initial change in spending will lead to a larger change in real GDP. If the multiplier is 4, then a $25 increase in investment spending will result in a $25 x 4 = $100 increase in real GDP.

If the Spending Multiplier Is Equal to 4, Then a $25