Assume that an economy's spending 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 spending multiplier of 4, a $125 billion spending cut would reduce total spending by 4 times that amount, or $500 billion, bringing the economy from a $2,000 billion equilibrium to a $1,500 billion full-employment equilibrium.

Assume That an Economy's Spending Multiplier Is 4