Suppose that the government spending multiplier is 2.7 and the tax multiplier is 3.8.This means that,if prices are constant,a $400 billion rise in government spending will __________________,and a $400 billion cut in taxes will _____________________.

Question

Quizplus · Accepted Answer

Given government spending multiplier = 2.7
Therefore, the change in Real GDP = government spending multiplier × change in government spending
That is, change in Real GDP = 2.7 × 400 billion = 1080 billion

Also, given tax multiplier = 3.8 
Therefore, the change in Real GDP = -tax multiplier × change in taxes (negative sign indicates inverse relationship between Real GDP and taxes)
That is, change in Real GDP = -3.8 × (-400) billion = 1520 billion

Hence, a $400 billion rise in government spending will raise Real GDP by $1,080 billion, and a $400 billion cut in taxes will raise Real GDP by $1,520 billion.

Suppose That the Government Spending Multiplier Is 2