The government estimates that the fiscal policy multiplier is 2.0. In this case an increase in government expenditure of $500 billion increases real GDP by ________ and results in an increase in induced expenditure of ________.

Question

Quizplus · Accepted Answer

The fiscal policy multiplier of 2.0 means that for every $1 increase in government expenditure, there will be a $2 increase in real GDP. Therefore, an increase in government expenditure of $500 billion will result in an increase in real GDP of $1,000 billion. However, the induced expenditure (consumption and investment spending) that results from this increase in real GDP will be only 50% of the increase in real GDP, or $500 billion.

The Government Estimates That the Fiscal Policy Multiplier Is 2