Suppose an initial increase in government expenditure increases output by $50,000. If the economy is producing at its potential, what is the size of the multiplier?
A) $25,000
B) $20,000
C) $12,500
D) $50,000
E) $0

Question

Quizplus · Accepted Answer

The multiplier effect does not apply when the economy is producing at its potential because additional government expenditure would not increase output further; it could lead to inflation or other adjustments, but not an increase in real output.

Suppose an Initial Increase in Government Expenditure Increases Output by $50,000