A $0.2 trillion increase in government purchases increases the quantity demanded by $1.0 trillion,price level remaining constant.This additional spending reflects the _____ effect.

Question

Quizplus · Accepted Answer

The scenario described in the question is an example of the simple spending multiplier at work. The spending multiplier shows how a change in government spending can lead to a larger change in GDP. In this case, the government spending increased by $0.2 trillion, which led to a $1.0 trillion increase in GDP. The price level remaining constant indicates that there is no inflationary pressure, and neither a recessionary nor an expansionary effect is present. Therefore, choice C, simple spending multiplier, is the best answer.

A $02 Trillion Increase in Government Purchases Increases the Quantity Demanded