Because a decrease in real autonomous spending results in a ________ in the price level, the ultimate effect on real GDP is ________ that predicted by the multiplier.
A) fall; smaller
B) fall; larger
C) rise; smaller
D) fall, smaller

Question

Quizplus · Accepted Answer

A decrease in real autonomous spending would result in a fall in the price level (deflation) as there is less demand for goods and services. As a result, the ultimate effect on real GDP is smaller than predicted by the multiplier effect. This is because the multiplier effect assumes that changes in spending lead to changes in income, which in turn lead to further changes in spending, and so on in a positive feedback loop. However, if the initial decrease in spending results in deflation, this can reduce demand further and lead to a smaller overall increase in real GDP.

Because a Decrease in Real Autonomous Spending Results in a ________