A $500 increase in investment will shift the aggregate expenditures curve up by:
A) exactly $500 and will increase the equilibrium level of real GDP by exactly $500.
B) exactly $500 and will increase the equilibrium level of real GDP by less than $500.
C) exactly $500 and will increase the equilibrium level of real GDP by more than $500.
D) more than $500 and will increase the equilibrium level of real GDP by more than $500.

Question

Quizplus · Accepted Answer

The increase in investment of $500 shifts the aggregate expenditures curve upward by exactly $500, but due to the multiplier effect, it increases the equilibrium level of real GDP by more than $500. This is because the initial investment generates income for those who receive it, who then spend a portion of this income, further increasing aggregate demand and GDP.

A $500 Increase in Investment Will Shift the Aggregate Expenditures