Suppose that the multiplier is 4, autonomous investment rises by $50 billion, and autonomous consumption falls by $50 billion at the same time.What will be the effect on equilibrium GDP?
A) Equilibrium GDP demanded will decrease by $200 billion.
B) Equilibrium GDP demanded will be the same, but the type of goods produced will be different.
C) Equilibrium GDP demanded will increase by $200 billion.
D) Equilibrium GDP demanded will increase by $400 billion.

Question

Suppose that the multiplier is 4, autonomous investment rises by $50 billion, and autonomous consumption falls by $50 billion at the same time.What will be the effect on equilibrium GDP?  
A) Equilibrium GDP demanded will decrease by $200 billion. 
B) Equilibrium GDP demanded will be the same, but the type of goods produced will be different. 
C) Equilibrium GDP demanded will increase by $200 billion. 
D) Equilibrium GDP demanded will increase by $400 billion.

Quizplus · Accepted Answer

The multiplier effect means that a change in spending will have a multiplied effect on the equilibrium GDP. However, since autonomous investment increases by $50 billion and autonomous consumption decreases by $50 billion simultaneously, the net change in autonomous spending is zero. Thus, the equilibrium GDP remains the same, but the composition of the GDP (the type of goods produced) may change.

Suppose That the Multiplier Is 4, Autonomous Investment Rises by $50