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Chapter 11: Q5. (page 236)

If the multiplier is 5 and investment increases by \(3 billion, equilibrium real GDP will increase by

  1. \)2 billion.

  2. \(3 billion.

  3. \)8 billion.

  4. $15 billion.

Short Answer

Expert verified

Option (d): $15 billion

Step by step solution

01

Step 1. Relation between the multiplier and real GDP

The multiplier measures the multiple increases in the income of an economy due to a change in a spending component like an investment. For example, an increase in investment has indirect effects on consumption, exports, and other spending components of GDP, resulting in a greater change in income. The income does not increase only because of investment increase but because of other components as well.

The multiplier (k) is related to change in income or real GDP in the following manner:

Change in investment (𝛥I) × k = Change in income (𝛥Y)

02

Step 2. Calculation for change in real GDP

k = 5

𝛥I = $3 billion

𝛥Y = 5 × $3 billion

𝛥Y = $15 billion

Therefore, the equilibrium real GDP will increase by $15 billion.

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Most popular questions from this chapter

Suppose that a certain country has an MPC of 0.9 and a real GDP of \(400 billion. If its investment spending decreases by \)4 billion, what will be its new level of real GDP?

True or False. If spending exceeds output, real GDP will decline as firms cut back on production.

Using the consumption and saving data in problem 1 and assuming investment is \(16 billion, what are saving and planned investment at the \)380 billion level of domestic output? What are saving and actual investment at that level? What are saving and planned investments at the \(300 billion level of domestic output? What are the levels of saving and actual investment? In which direction and by what amount will unplanned investment change as the economy moves from the \)380 billion level of GDP to the equilibrium level of real GDP? From the \(300 billion level of real GDP to the equilibrium level of GDP?

Possible Levels of Employment, Millions

Real Domestic Output (GDP = DI), Billions

Consumption, Billions

Saving, Billions (DI – C)

40

\)240

\(244

-\)4

45

260

260

0

50

280

276

4

55

300

292

8

60

320

308

12

65

340

324

16

70

360

340

20

75

380

356

24

80

400

372

28

Why does equilibrium real GDP occur where C + Ig = GDP in a private closed economy? What happens to real GDP when C + Ig exceeds GDP? When C + Ig is less than GDP? What two expenditure components of real GDP are purposely excluded in a private closed economy?

A depression abroad will tend to _______ our exports, which in turn will _______ net exports, which in turn will ______ equilibrium real GDP.

  1. reduce; reduce; reduce

  2. increase; increase; increase

  3. reduce; increase; increase

  4. increase; reduce; reduce
See all solutions

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