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?
A) Equilibrium investment will increase by less than $200 billion.
B) Equilibrium investment will decrease by more than $200 billion.
C) Equilibrium real GDP demanded will increase by more than $200 billion.
D) Equilibrium real GDP demanded will decrease by less than $200 billion.

Question

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?  
A) Equilibrium investment will increase by less than $200 billion. 
B) Equilibrium investment will decrease by more than $200 billion. 
C) Equilibrium real GDP demanded will increase by more than $200 billion. 
D) Equilibrium real GDP demanded will decrease by less than $200 billion.

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