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.

Question

Quizplus · Accepted Answer

Given a multiplier of 4, a $125 billion spending cut would reduce the GDP by 4 times that amount, which equals $500 billion. This would bring the GDP from $2,000 billion down to $1,500 billion, achieving the desired equilibrium.

Assume That an Economy's Real GDP Multiplier Is 4