The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $82 billion, real GDP
A) will increase by less than $82 billion if the economy was initially operating well below capacity.
B) will increase by more than $82 billion if the economy was initially operating well below capacity.
C) will increase by more than $82 billion if the economy was initially operating at full-employment capacity.
D) will decline if the marginal propensity to consume is less than 1.

Question

Quizplus · Accepted Answer

The multiplier effect states that an initial increase in spending will lead to a larger increase in GDP. If business decision makers become more optimistic and increase their investment expenditures by $82 billion, this will increase aggregate demand and result in an increase in GDP. However, the size of the increase in GDP depends on the initial state of the economy. If the economy is operating well below capacity, there is significant slack in the economy that can be utilized to produce more output. In this case, the multiplier effect will cause GDP to increase by more than the initial increase in spending, meaning GDP will increase by more than $82 billion.

The Multiplier Principle Indicates That If Business Decision Makers Become