Suppose there is a $20 million increase in government spending. We know that this increase in government spending will cause which of the following to occur?
A) an increase in equilibrium real GDP and an increase in the multiplier.
B) an increase in equilibrium real GDP and a reduction in the multiplier.
C) an increase in equilibrium real GDP and no change in the multiplier.
D) equilibrium real GDP will increase by exactly $20 million.

Question

Quizplus · Accepted Answer

An increase in government spending directly increases aggregate demand, leading to an increase in equilibrium real GDP. The multiplier effect describes how an initial change in spending leads to further increases in income and spending. However, the multiplier itself is determined by the marginal propensities to consume and save, not by the level of government spending, so it does not change with an increase in government spending.

Suppose There Is a $20 Million Increase in Government Spending