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Chapter 10: Q8. (page 214)

If a \(50 billion initial increase in spending leads to a \)250 billion change in real GDP, how big is the multiplier?

  1. 1.0

  2. 2.5

  3. 4.0

  4. 5.0

Short Answer

Expert verified

Option (d): 5.0

Step by step solution

01

Meaning of the multiplier

A multiplier measures the rate of change in income induced by the change in any of its expenditure components (consumption, investment, and government expenditure).An increase in income is equal to a proportional increase in the respective spending component. This proportion that causes a change in income is called a multiplier.

The following formula gives the multiplier effect of change in expenditure:

△Y=k×△Expenditurek=△Y△Expenditure, where k is the multiplier.

02

Calculating the multiplier

Given: The change in income is $250 billion, and the change in total spending is $50 billion.

k = 250/50

k = 5

Therefore, the multiplier value is 5.0.

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Most popular questions from this chapter

Irving owns a chain of movie theaters. He is considering whether he should build a new theater downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

  1. Yes

  2. No

What is the central economic idea humorously illustrated in the Last Word “TopplingDominoes”? How does the central idea relate to economic recessions, on the one hand, and vigorous economic expansions, on the other?

How is it possible for investment spending to increase even in a period in which the real interest rate rises?

How can governments utilize fiscal policy?

Linear equations for the consumption and saving schedules take the general form C = a + bY and S = − a + (1 − b)Y, where C, S, and Y are consumption, saving, and national income, respectively. The constant a represents the vertical intercept, and b represents the slope of the consumption schedule.

a. Use the following data to substitute numerical values for a and b in the consumption and saving equations.

National Income (Y)Consumption (C)
\(080
100140
200200
300260
400320

b. What is the economic meaning of b? Of (1 − b)?

c. Suppose that the amount of saving that occurs at each level of national income falls by \)20 but that the values of b and (1 − b) remain unchanged. Restate the saving and consumption equations inserting the new numerical values, and cite a factor that might have caused the change.
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