Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The simple multiplier is equal to
A)-2.5.
B)-0.6.
C)0.4.
D)0.6.
E)2.5.

Question

Quizplus · Accepted Answer

The simple multiplier is calculated using the formula:

Multiplier = Change in Equilibrium National Income / Initial Change in Autonomous Expenditure

In this case, the initial change in autonomous expenditure is -$20 million (a decrease in autonomous investment expenditure of $20 million). We are told that this leads to a reduction in equilibrium national income of -$50 million.

So, the multiplier is:

Multiplier = -$50 million / -$20 million = 2.5

Therefore, the answer is E) 2.5.

Suppose Aggregate Output Is Demand-Determined