A government increases its spending by $100 million, which leads to an increase

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Question: A government increases its spending by $100 million, which leads to an increase in GDP by $400 million. What is the multiplier effect?

Options:

Correct Answer: 4

Solution:

Multiplier = Change in GDP / Change in Spending = $400 million / $100 million = 4.

A government increases its spending by $100 million, which leads to an increase in GDP by $400 million. What is the multiplier effect?

A government increases its spending by $100 million, which leads to an increase in GDP by $400 million. What is the multiplier effect?

Step 1: Identify the change in government spending. In this case, it is $100 million.
Step 2: Identify the change in GDP resulting from the increase in spending. Here, it is $400 million.
Step 3: Use the formula for the multiplier effect, which is: Multiplier = Change in GDP / Change in Spending.
Step 4: Plug in the values: Multiplier = $400 million / $100 million.
Step 5: Calculate the result: $400 million divided by $100 million equals 4.
Step 6: Conclude that the multiplier effect is 4.

Multiplier Effect – The multiplier effect refers to the proportional amount by which GDP increases in response to an increase in government spending.