Question

If the multiplier is 5 and investment increases by $\$ 3$ billion, equilibrium real GDP will increase by: a. $\$ 2$ billion. b. $\$ 3$ billion. c. $\$ 8$ billion. d. $\$ 15$ billion. e. None of the above.

Name: Problem 5, Chapter 29: Economics: Principles, Problems, and Policies
Uploaded: 2021-07-15T17:20:50-08:00
Duration: 1 min 14 s
Channel: Kaylee Mcclellan
Description: If the multiplier is 5 and investment increases by 3 billion, equilibrium real GDP will increase by: a. 2 billion. b. 3 billion. c. 8 billion. d. 15 billion. e. None of the above.

   If the multiplier is 5 and investment increases by $\$ 3$ billion, equilibrium real GDP will increase by:
a. $\$ 2$ billion.
b. $\$ 3$ billion.
c. $\$ 8$ billion.
d. $\$ 15$ billion.
e. None of the above.

Economics: Principles, Problems, and Policies

Campbell R.… 20th Edition

Chapter 29, Problem 5

Instant Answer

Solved by Expert Kaylee Mcclellan

07/15/2021

Step 1

The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. The formula for the multiplier is given by $ \text{Multiplier} = \frac{1}{1 - MPC} $ where MPC is the Show more…

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If the multiplier is 5 and investment increases by $\$ 3$ billion, equilibrium real GDP will increase by: a. $\$ 2$ billion. b. $\$ 3$ billion. c. $\$ 8$ billion. d. $\$ 15$ billion. e. None of the above.

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Key Concepts

Equilibrium Real GDP

Equilibrium real GDP is the level where aggregate demand equals aggregate supply. Changes in components of aggregate demand, like investment, shift this equilibrium, and the multiplier effect helps determine the magnitude of the new equilibrium GDP level.

Multiplier Effect

This is the economic principle where an initial change in spending, such as an increase in investment, leads to a larger change in overall income and GDP. The multiplier quantifies this effect, indicating how much total change in GDP can be expected from a unit change in spending.

Investment as an Economic Injection

Investment is a component of aggregate demand that, when increased, injects additional spending into the economy. This injection initially adds directly to GDP and then creates further rounds of spending through its impact on income.

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