Under what circumstances will the multiplier effect have a big impact on Real GDP?
A)When the AS curve is vertical.
B)When the AD curve is vertical.
C)When the AS is horizontal.
D)When the economy is booming.

Question

Quizplus · Accepted Answer

The multiplier effect will have a big impact on Real GDP when the AS (aggregate supply) curve is horizontal. This means that an increase in aggregate demand will lead to a larger increase in Real GDP, as there is plenty of spare capacity in the economy to produce more goods and services. In contrast, if the AS curve is vertical (as in the long run), any increase in aggregate demand will only lead to higher prices, with limited impact on Real GDP. The AD (aggregate demand) curve being vertical or the economy booming do not necessarily imply a large impact of the multiplier.

Under What Circumstances Will the Multiplier Effect Have a Big