How Much Will GDP Change After a $400 Billion Decrease in Government Purchases, If the Multiplier is 1.25?

Real Gross Domestic Product (GDP) Expansion

According to the Bureau of Economic Analysis' "advance" estimate, real gross domestic product (GDP) expanded at an annual rate of 2.6 percent in the third quarter of 2022 (table 1). The real GDP fell by 0.6% in the second quarter.

Impact of GDP Expansion

A rising GDP indicates that the economy is expanding, which increases the resources accessible to citizens in the form of goods, services, wages, and profits. The demand for money will rise as the GDP rises because more people will need money to conduct the transactions required to acquire the new GDP. In other words, the effect of transaction demand causes a rise in the demand for real money.

GDP Change Calculation

Change in GDP = Multiplier * Change in Government Purchases
1.25 * (-$400 billion) = -398.75 billion

Conclusion

Hence, the GDP change after a $400 billion decrease in government purchases, if the multiplier is 1.25, will be -398.75 billion.

How much will GDP change after a $400 billion decrease in government purchases, if the multiplier is 1.25?

The GDP change after a $400 billion decrease in government purchases, if the multiplier is 1.25 will be -398.75 billion.

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