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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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Most popular questions from this chapter

Assume there are no investment projects in the economy that yield an expected rate of return of 25 percent or more. But suppose there are \(10 billion of investment projects yielding expected returns of between 20 and 25 percent; another \)10 billion yielding between 15 and 20 percent; another $10 billion between 10 and 15 percent; and so forth. Cumulate these data and present them graphically, putting the expected rate of return (and the real interest rate) on the vertical axis and the amount of investment on the horizontal axis. What will be the equilibrium level of aggregate investment if the real interest rate is (a) 15 percent, (b) 10 percent, and (c) 5 percent?

Why is investment spending unstable?

What will the multiplier be when the MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? If the MPC instead is 0.67?

Why will a reduction in the real interest rate increase investment spending, other things equal?

Suppose a handbill publisher can buy a new duplicating machine for \(500, and the duplicator has a 1-year life. The machine is expected to contribute \)550 to the year's net revenue. What is the expected rate of return? If the real interest rate at which funds can be borrowed to purchase the machine is 8 percent, will the publisher choose to invest in the machine? Will it invest in the machine if the real interest rate is 9 percent? If it is 11 percent?
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