Suppose the spending multiplier is greater than 1.0.Which of the following will be the result of a $200 billion increase in autonomous investment?

Question

Quizplus · Accepted Answer

If the spending multiplier is greater than 1.0, then an increase in autonomous investment will lead to a larger increase in equilibrium real GDP demanded. Therefore, the $200 billion increase in autonomous investment will lead to an increase in equilibrium real GDP demanded by more than $200 billion. Option A is incorrect because the spending multiplier being greater than 1.0 implies that a change in autonomous investment will be multiplied more than proportionally by the resulting changes in consumption, investment, and aggreate demand. Option B is also incorrect because an increase in autonomous investment will increase equilibrium investment, not decrease it. Option D is incorrect because the spending multiplier being greater than 1.0 implies that the increase in equilibrium real GDP demanded will be greater than the increase in autonomous investment.

Suppose the Spending Multiplier Is Greater Than 1