If government expenditure rises by $40 billion and the multiplier in the economy is 2.5, then real GDP_____, and the IS curve shifts to the_____.
A)rises by $40 billion; right
B)falls by $40 billion; left
C)rises by $100 billion; right
D)rises by $16 billion; right

Question

Quizplus · Accepted Answer

If government expenditure rises by $40 billion and the multiplier in the economy is 2.5, then the increase in real GDP would be 2.5 times $40 billion, which equals $100 billion. This would result in a rightward shift of the IS curve, indicating a higher level of equilibrium output at each interest rate.

If Government Expenditure Rises by $40 Billion and the Multiplier