Final answer:
The multiplier effect explains how changes in spending (investment, government, or consumption) can lead to a proportionate change in the total economic output. Specifically, with a spending injection necessary to increase GDP by 300, the multiplier is calculated as 2.2837, and an initial spending boost of 131.25 is required.
Step-by-step explanation:
The concept described in the question pertains to the calculation and understanding of the multiplier effect, which is an economic term referring to the proportionate amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. A 'G' value of 331.25 represents a gross increase of 131.25 from its original level, which means that the income has increased by this margin. In economic terms, the multiplier is calculated based on the proportion of after-tax income that is not consumed domestically, i.e., the proportion that is taxed, saved, or spent on imports. The formula used to calculate the multiplier is 1 divided by the sum of the marginal propensity to save, tax, and import ratios. From the given scenario, out of every dollar spent, 0.5625 remains, as calculated by 1 - (0.25 taxes + 0.1125 savings + 0.075 imports).
Using this, the multiplier is found by dividing 1 by the remaining 0.5625, which equals 2.2837. This implies that in order to increase the equilibrium GDP by 300, an initial boost of 300/2.2837 is required, which translates to an increase of 131.25. This use of the multiplier effect in economics can predict how fiscal policy measures, like government spending or tax cuts, will impact the gross domestic product.