Assume that the multiplier effect for Mexico is 0.85 when U.S.government spending increases.Therefore, a $20 billion decrease in U.S.government spending results in:

Question

Quizplus · Accepted Answer

If the multiplier effect for Mexico is 0.85, then we can use the formula ΔY = m × ΔG, where ΔY is the change in Mexican real GDP, m is the multiplier effect, and ΔG is the change in U.S. government spending. Substituting the values, we get ΔY = 0.85 × (-$20 billion) = -$17 billion. Therefore, a $20 billion decrease in U.S. government spending would result in a $17 billion decrease in Mexican real GDP. So, the answer is D.

Assume That the Multiplier Effect for Mexico Is 0