If an increase in investment of $50 causes an increase in real GDP of $250, the value of the spending multiplier is:
A) 5.
B) 0.20.
C) 0.80.
D) 10.

Question

Quizplus · Accepted Answer

The spending multiplier is the ratio of the change in real GDP to the change in investment. Therefore, the spending multiplier in this case is:

Spending multiplier = Change in real GDP / Change in investment
Spending multiplier = $250 / $50
Spending multiplier = 5

Thus, an increase in investment of $50 leads to a total increase in real GDP of $250, which suggests a spending multiplier of 5.

If an Increase in Investment of $50 Causes an Increase