Suppose the government spending multiplier is 2.The federal government cuts spending by $40 billion.What is the change in GDP if the price level is not held constant?

Question

Quizplus · Accepted Answer

If the government spending multiplier is 2, it means that for every dollar decrease in government spending, GDP will decrease by $2. Therefore, if the federal government cuts spending by $40 billion, GDP will decrease by $80 billion (2 times $40 billion). It is a decrease of less than $80 billion, so the correct choice is D.

Suppose the Government Spending Multiplier Is 2