The expenditure multiplier is 5 and, as a result of a change in expenditure, equilibrium expenditure and real GDP change by $200 billion.What was the initial change in autonomous expenditure?
A) $50 billion
B) $40 billion
C) $20 billion
D) $200 billion
E) $1,000 billion

Question

Quizplus · Accepted Answer

The expenditure multiplier formula is:
Expenditure Multiplier = 1 / (1 - MPC)
where MPC is the marginal propensity to consume.

If the expenditure multiplier is 5, then we can say that:
Expenditure Multiplier = ΔY / ΔE
where ΔY is the change in equilibrium expenditure and ΔE is the initial change in autonomous expenditure.

We are told that equilibrium expenditure and real GDP change by $200 billion. Therefore, ΔY = $200 billion.

Using the formula for the expenditure multiplier, we can solve for ΔE:
5 = $200 billion / ΔE
ΔE = $40 billion

Therefore, the initial change in autonomous expenditure was $40 billion. The correct answer is B.

The Expenditure Multiplier Is 5 And, as a Result of a Change