Suppose the government increases its purchases by $100 and the multiplier is 4.How does equilibrium real GDP demanded change?
A) It increases by $25.
B) It decreases by $25.
C) It increases by $400.
D) It decreases by $400.

Question

Suppose the government increases its purchases by $100 and the multiplier is 4.How does equilibrium real GDP demanded change?  
A) It increases by $25. 
B) It decreases by $25. 
C) It increases by $400. 
D) It decreases by $400.

Quizplus · Accepted Answer

The multiplier of 4 means that the increase in government spending will have a magnified impact on the economy. Specifically, total output will increase by a multiple of the initial increase in government spending, which is $100. Thus, equilibrium real GDP demanded will increase by $400 ($100 multiplied by the multiplier of 4).

Suppose the Government Increases Its Purchases by $100 and the Multiplier