Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to: A. decrease by $50 billion. B. decrease by $150 billion. C. remain unchanged since spending on military goods is unproductive and usually wasteful. D. decrease by $25 billion.

Question

Business

Mya Strong

17 July, 22:38

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to: A. decrease by $50 billion. B. decrease by $150 billion. C. remain unchanged since spending on military goods is unproductive and usually wasteful. D. decrease by $25 billion.

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Answers (1)

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Christian Merritt · Answer 1

The answer is: A) decrease by $50 billion.

Explanation:

An economic multiplier is an economic factor that when changed, causes changes in related economic variables. It amplifies or decreases the base value of economic variables.

In this case the economy's multiplier is two, so any change in a component of the GDP will cause twice the effect on the total GDP.

A $25 billion decrease in government x 2 = $50 billion decrease in GDP.