Question

if a $50 billion initial increase in spending leads to a $250 billion change in real gdp, howbig is the multiplier?a. 1.0.b. 2.5.c. 4.0.d. 5.0.

Answer 1

The multiplier effect is calculated by dividing the change in real GDP by the initial spending increase, which in this case is $250 billion divided by $50 billion, resulting in a multiplier of 5.0.

Step-by-step explanation:

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, the size of the multiplier can be calculated by dividing the total change in GDP by the initial increase in spending.

Therefore, the multiplier = $250 billion / $50 billion = 5.

This indicates that every dollar of initial spending leads to a total of $5 in GDP.

The multiplier is significantly influenced by the economic behavior of consumers, such as their propensity to save, pay taxes, and buy imports.

These behaviors are referred to as 'leakages' because they affect how much subsequent spending is spurred by the initial injection of spending.

Using the formula provided, the answer to the question is:

d. 5.0