If the multiplier is 7 and if there is no crowding-out effect,then a $50 billion increase in government expenditures causes aggregate demand to
A) increase by $250 billion.
B) increase by $175 billion.
C) increase by $350 billion.
D) None of the above are correct.

Question

Quizplus · Accepted Answer

The multiplier effect shows how a change in any component of aggregate spending has a multiplied effect on the overall GDP. The formula for the multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. Since the multiplier is given as 7, the MPC can be calculated as 1/7 = 0.1429.

Therefore, a $50 billion increase in government spending would lead to an increase in aggregate demand by:
Multiplier x Change in government spending = 7 x $50 billion = $350 billion

Thus, answer choice C is correct.

If the Multiplier Is 7 and If There Is No