Suppose the multiplier is 2 and the short-run aggregate supply curve is positively sloped. Investment increases by $10 billion. In the short run, equilibrium real GDP
A)increases by $20 billion.
B)increases by more than $20 billion.
C)decreases by less than $20 billion.
D)does not change.
E)increases by less than $20 billion.

Question

Quizplus · Accepted Answer

With a multiplier of 2, an increase in investment by $10 billion should lead to an increase in equilibrium real GDP by $20 billion in the long run. However, in the short run, the positive slope of the short-run aggregate supply curve means that there may be price stickiness and firms may not be able to adjust their prices immediately to changes in demand. This leads to a less than proportional increase in real GDP. Therefore, the increase in real GDP will be less than $20 billion, making choice E the best answer.

Suppose the Multiplier Is 2 and the Short-Run Aggregate Supply