If the multiplier is 2.5 and defense expenditures decrease by $10 million,aggregate demand decreases by a total of:
A) $5 million.
B) $10 million.
C) $25 million.
D) $100 million.

Question

Quizplus · Accepted Answer

The correct answer is C) $25 million. This is because the multiplier effect indicates how much the aggregate demand will change in response to a change in spending. With a multiplier of 2.5, a decrease in defense expenditures by $10 million will lead to a total decrease in aggregate demand of $10 million multiplied by 2.5, which equals $25 million.

If the Multiplier Is 2