Assume that an economy's real GDP multiplier is 2 and that this economy is in equilibrium at $500 billion. If the government wants to move this economy to full-employment at $600 billion, while maintaining a balanced budget, it must choose which of the following options?
A) Increase government spending and taxes by $100 billion
B) Decrease government spending and taxes by $100 billion
C) Increase government spending and taxes by $200 billion
D) Decrease government spending and taxes by $200 billion

Question

Quizplus · Accepted Answer

To achieve a $100 billion increase in GDP with a multiplier of 2, the government needs to increase spending by $50 billion. However, to maintain a balanced budget, it must also increase taxes by the same amount, $50 billion. None of the options exactly match this calculation, but option A (increase government spending and taxes by $100 billion) is the closest to the correct approach, given the options provided. The explanation assumes a direct understanding of the multiplier effect and balanced budget changes, but the precise numbers in the options do not align with the standard multiplier formula. This might be a simplification or error in the question's construction.

Assume That an Economy's Real GDP Multiplier Is 2 and That