If the multiplier is 5 and defense expenditures decrease by $40 million,aggregate demand decreases by a total of:
A) $8 million.
B) $20 million.
C) $40 million.
D) $200 million.

Question

Quizplus · Accepted Answer

The correct answer is D) $200 million. This is because the multiplier effect means that a change in spending will lead to a larger change in the overall economic activity. With a multiplier of 5, a decrease in defense expenditures by $40 million will result in a total decrease in aggregate demand of 5 times $40 million, which is $200 million.

If the Multiplier Is 5 and Defense Expenditures Decrease by $40