Question

If the expenditure multiplier is 4 and government expenditure rises by ________, this will shift the...

If the expenditure multiplier is 4 and government expenditure rises by ________, this will shift the
AE upward by and the AD rightward by .__________
(A) 4; 25
(B) 4; 100
(C) 25; 400
(D) 25; 100

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Answer #1

Ans: The correct option is (d) 25; 100 because if expenditure multiplier is 4. This implies that the aggregate demand (AD) changes by the multiple of 4 of changes in government expenditure.

Changes in AD = Multiplier × Change in Government Expenditure ()

Thus if Change in Government Expenditure () is 25 and multiplier is 4 then

change in AD = 4 × 25 = 100

Thus if the government expenditure rises by 25 and the multiplier is 4 then AD will shift rightwards by 25 × 4 = 100

thus correct option is (d).

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