Other things equal,if $100 billion of government purchases (G)is added to private spending (C + I_g + X_n),GDP will: A) increase by $100 billion. B) increase by less than $100 billion. C) increase by more than $100 billion. D) fall by $100 billion.

Question

Quizplus · Accepted Answer

The multiplier effect suggests that when government spending increases, it leads to an increase in private spending, which further increases GDP. The extent of this increase depends on the size of the multiplier, which is determined by various factors such as the marginal propensity to consume, taxes, and imports. Therefore, other things being equal, an increase in government purchases of $100 billion will lead to a larger increase in GDP than $100 billion, making answer choice (C) the best choice.

Other Things Equal,if $100 Billion of Government Purchases (G)is Added