Question

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?
a. an increase in government expenditures
b. an increase in net exports
c. an increase in investment spending
d. All of the above are correct.

Answer 1

All of the given options would shift aggregate demand to the right by more than the increase in expenditures.

Answer: Option D

Explanation:

When an economy is at rest than the state is termed as equilibrium but multiplier effect is seen when primary variation in collective demand can have bigger impact on equilibrium level of national income.

Multiplier effect is of two type positive (when primary hike in an injection result into greater final hike in real GDP) and negative (when primary decline in an injection result into greater final decline in real GDP). Here all the options can shift the aggregate demand to the right by more than increase in expenditure and show positive multiplier effect.