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An economist says she believes the governnment expenditure multipier is 0.8.This measns that she believes that...

An economist says she believes the governnment expenditure multipier is 0.8.This measns that she believes that a $1 billion increase in G will (Please explain)

A. involve enough crowding-out that the net effect on real GDP wiil be smaller than the change in G.

B. have no effect on employment other than those jobs created directly by the additionak government spending.

C. increase real GDP by $1 billion plus and additional $0.8 billion.

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Answer #1

A. involve crowding out that the net effect on real GDP will be smaller than the change in G.

Crowding put means an increase in government spending will increase intereat rate which will reduce private investment so entire effect of increase in G is not reflected in GDP because of decline in private investment.
Government expenditure multiplier is change in Real GDP/change in G
So, change in GDP = (0.8)*(change in G) = (0.8)*(1) = 0.8 billion
Thus, net effect on real GDP is smaller due to crowding out.

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