In the short run,the impact of a $50 billion spending package on GDP will be
A) greater than $50 billion because of the multiplier effect
B) less than $50 billion because of the tax code
C) greater than $50 billion because of the tax code
D) exactly $50 billion
E) greater than $50 billion because of crowding out.

Question

Quizplus · Accepted Answer

In the short run, the impact of a $50 billion spending package on GDP will be greater than $50 billion because of the multiplier effect. The multiplier effect occurs when an initial increase in spending leads to additional increases in spending throughout the economy. This happens as the initial spending increases income and encourages the recipients of that income to spend more. As a result, the total increase in spending in the economy is greater than the initial increase in spending. Therefore, the impact on GDP will be greater than $50 billion.

In the Short Run,the Impact of a $50 Billion Spending