Final answer:
By applying the multiplier effect, a $27.5 billion increase in government spending with a multiplier of 2.5 would lead to a $68.75 billion rise in the GDP.
Step-by-step explanation:
The student's question relates to the concept of the multiplier effect in economics, which describes how an initial increase in spending leads to a larger overall impact on the economy. If government expenditures rise by $27.5 billion and the multiplier in the economy is 2.5, then the total increase in the Gross Domestic Product (GDP) can be calculated by multiplying the change in government spending by the multiplier. In this case, the increased expenditure would lead to a rise in aggregate economic output (GDP) by:
- Calculating the change in GDP: $27.5 billion × 2.5 = $68.75 billion.
This means that an original change in government spending of $27.5 billion, with a multiplier of 2.5, would result in an increase in GDP of $68.75 billion.