Assume that initially G is $100 and equilibrium real GDP demanded is $1,000.Suppose the multiplier is 4 and G increases to $200.By what amount will real GDP demanded increase?
A) by $100
B) by $1,000
C) by $1,400
D) by $2,000

Question

Assume that initially G is $100 and equilibrium real GDP demanded is $1,000.Suppose the multiplier is 4 and G increases to $200.By what amount will real GDP demanded increase?  
A) by $100 
B) by $1,000 
C) by $1,400 
D) by $2,000

Quizplus · Accepted Answer

The formula for the multiplier effect is ∆Y = k∆G, where ∆Y is the change in real GDP demanded, k is the multiplier, and ∆G is the change in government spending.

In this case, k = 4 and ∆G = $100 (the increase in government spending).

∆Y = 4 x $100 = $400

Therefore, real GDP demanded will increase by $400. The new equilibrium real GDP demanded will be $1,400 ($1,000 + $400).

Assume That Initially G Is $100 and Equilibrium Real GDP