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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

What are the main macroeconomic policies used to achieve macroeconomic objectives?

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.

True or False. Real GDP is more volatile (variable) than gross investment.

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

Why is the actual multiplier in the U.S. economy less than the multiplier in this chapter’s example?
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