When investment increases, the expenditure multiplier points out that
A) consumption decreases by a greater amount.
B) real GDP increases by a greater amount.
C) consumption increases by the same amount.
D) real GDP decreases by a greater amount.
E) ultimately investment increases by more than the initial increase.

Question

Quizplus · Accepted Answer

The expenditure multiplier shows the overall effect of an initial increase in investment on real GDP. When investment increases, it will lead to an increase in overall spending (including investment, consumption, and government spending) in the economy. This increase in spending will in turn lead to an increase in overall output (i.e. real GDP) by a greater amount than the initial increase in investment. Therefore, the correct answer is that real GDP increases by a greater amount.

When Investment Increases, the Expenditure Multiplier Points Out That