In: Economics
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___________________________.
A $1________________in______________________will_________________real GDP by___________________________.
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. )