that an initial $10 billion increase in investment spending expands GDP by $10 billion in the first round of the multiplier process. Also suppose that GDP and consumption both rise by $6 billion in the second round of the process.

Question

Instructions: In parts a and b, round your answers to 1 decimal place. In part c, enter your answer as a whole number
What is the size of the multiplier

Answer 1

To determine the size of the multiplier, we utilize the formula for the multiplier effect in economics:

\[ \text{Multiplier} = \frac{\text{Change in GDP}}{\text{Initial Change in Investment}} \]

From the information given:

1. The initial change in investment spending is $10 billion.
2. The total change in GDP after the first and second rounds is $10 billion (first round) + $6 billion (second round) = $16 billion.

Now we can plug these values into the multiplier formula:

\[ \text{Multiplier} = \frac{16 \text{ billion}}{10 \text{ billion}} = 1.6 \]

Answer for part a: The size of the multiplier is 1.6.

This indicates that for every dollar of initial investment, the total increase in GDP is $1.60.