If the multiplier is 3,a $1 billion decrease in government spending will
A) lower equilibrium GDP by one-third.
B) lower equilibrium GDP by 3.
C) raise equilibrium GDP by one-third.
D) raise equilibrium GDP by 3.
E) leave equilibrium GDP unchanged but change intended spending by one-third.

Question

Quizplus · Accepted Answer

The multiplier effect suggests that changes in government spending, taxes, or investment have an amplified effect on equilibrium GDP. If the multiplier is 3 and there is a $1 billion decrease in government spending, the resulting change in GDP would be three times greater, or $3 billion. Therefore, the equilibrium GDP would lower by $3 billion, which means the answer is B.

If the Multiplier Is 3,a $1 Billion Decrease in Government