The multiplier principle indicates that if business decision makers become more optimistic about the future and,as a result,increase their investment expenditures by $50 billion,real GDP
A)will increase by less than $50 billion if the economy was initially operating well below capacity.
B)will increase by more than $50 billion if the economy was initially operating well below capacity.
C)will increase by more than $50 billion if the economy was initially operating at full-employment capacity.
D)will decline if the marginal propensity to consume is less than 1.

Question

Quizplus · Accepted Answer

The multiplier principle suggests that an initial increase in investment spending can lead to subsequent rounds of spending as new income is generated. The size of the multiplier effect depends on the marginal propensity to consume (MPC), with a larger MPC creating a larger multiplier effect. If the economy was initially operating well below capacity, then there is likely to be more idle resources that can be utilized, which could lead to an even larger increase in real GDP. Therefore, if business decision makers increase investment expenditures by $50 billion, it is likely to lead to a larger increase in real GDP if the economy is operating below capacity.

The Multiplier Principle Indicates That If Business Decision Makers Become