If government expenditure on goods and services increase by $10 billion, then aggregate demand
A)increases by $10 billion.
B)increases by $10 billion multiplied by the government expenditure multiplier.
C)increases by $10 billion multiplied by the tax multiplier.
D)decreases by $10 billion.
E)decreases by $10 billion multiplied by the government expenditure multiplier.

Question

Quizplus · Accepted Answer

When government expenditure on goods and services increases, it directly increases the aggregate demand by the same amount. However, it also triggers a ripple effect on the economy by increasing the income of individuals and businesses, who in turn spend some of that extra income, further increasing the aggregate demand. The government expenditure multiplier refers to this ripple effect, which determines the overall impact of government spending on the economy. Therefore, the total increase in aggregate demand will be the initial increase in government expenditure multiplied by the government expenditure multiplier.

If Government Expenditure on Goods and Services Increase by $10