Suppose that every increase of $1 in real GDP automatically stimulates $0

Economics Mar 19, 2021

Suppose that every increase of $1 in real GDP automatically stimulates $0.20 in additional investment spending. How would this affect the multiplier?

Expert Solution

Computation of Multiplier:

Multiplier = Change in real GDP / Change in investment spending

= 1 / 0.20

= 5

So, The investment spending multiplier will be 5 due to an additional increase in the investment spending which has been caused by an increase in the real GDP by $1.

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