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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:

鈻�Y=k脳鈻�Expenditurek=鈻�Y鈻�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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Refer to the table below.

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