Assume that an economy's real GDP multiplier is 4. If this economy is in equilibrium at $2,000 billion, then which one of the following actions will bring it to a full-employment equilibrium of $1,500 billion?
A) $500 billion spending cut.
B) $500 billion spending increase.
C) $125 billion spending cut.
D) $125 billion spending increase.
E) $2,000 billion spending cut.

Question

Quizplus · Accepted Answer

A $125 billion spending cut, with a multiplier of 4, will reduce GDP by $500 billion, bringing it from $2,000 billion to $1,500 billion.

Assume That an Economy's Real GDP Multiplier Is 4