Question

In preparing their estimates of the stimulus package's effect on GDP, Obama administration economists estimated a government purchases multiplier of 1.57. This indicates that a $1 billion increase in government purchases would increase equilibrium real GDP by __________.

a) $1 billion
b) $10 billion
c) $100 billion
d) $157 billion

Answer 1

Answer: $1.57 billion

Explanation:

Given that,

Government purchases multiplier = 1.57

Increase in government purchases = $1 billion

$Multiplier=\frac{Change\ in\ Real\ GDP}{Change\ in\ Government\ Purchases}$

$1.57=\frac{Change\ in\ Real\ GDP}{1,000,000,000}$

Change in Real GDP = 1.57 × 1,000,000,000

                                  = $1,570,000,000

                                  = $1.57 billion

Hence, $1 billion increase in government purchases will lead to increase equilibrium real GDP by $1.57 billion.