If the multiplier is 4, equilibrium real GDP is $600 billion, and investment is $25 billion, what will happen if investment increases to $30 billion? Real GDP will:
A)increase to $605 billion
B)decrease to $595 billion
C)increase to $620 billion
D)increase to $624 billion
E)decrease to $580 billion

Question

Quizplus · Accepted Answer

The multiplier effect states that an increase in investment will lead to a larger increase in real GDP. In this case, the multiplier is 4, which means that a $1 increase in investment will lead to a $4 increase in real GDP. Therefore, if investment increases by $5 billion, real GDP will increase by $20 billion, from $600 billion to $620 billion.

If the Multiplier Is 4, Equilibrium Real GDP Is $600