Question

When the economy is in a recession, the government will want to increase output. If the multiplier equals 2.5 and the government increases spending by 200, how much will output increase by?
(A) 100
(B) 300
(C) 500
(D) 900

Answer 1

Answer: Option (c) is correct.

Explanation:

Given that,

Economy is in a recession and in this situation government wants to increase the output.

Multiplier = 2.5

Government increases spending by 200 then,

Output increase by:

= Multiplier × Increase in Government spending

= 2.5 × 200

= 500

Therefore, output increase by 500.