Fill in the blanks in the following statements to interpret the idea behind government purchases multiplier...

Fill in the blanks in the following statements to interpret the idea behind government purchases multiplier being equal to 2 (hint: consider both expansionary and contraction nary fiscal policy cases).

Answer:

A $1________________in______________________will_________________real GDP by___________________________.

Solutions

Expert Solution

Expansionary

a) "$1 billion" in "government purchase" will "increase" real GDP by "$2 billion.". (as the multiplier is 2 the effect of expansion will be twice the actual amount.)

Contractionary

b) "$1 billion" in " increased taxes" will "decrease" real GDP by "$2billion". (again the multiplier will result in the increased effect of taxes on the economy. This works both ways increasing and decreasing. )

Rahul Sunny answered 2 years ago

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