If the Multiplier Is 2 and Investment Spending Falls by $5

question 244

Multiple Choice

If the multiplier is 2 and investment spending falls by $5 billion, then equilibrium income:

• A) increases by $10 billion.
• B) increases by $2.5 billion.
• C) decreases by $5 billion.
• D) decreases by $10 billion.

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Definitions:

Long-run Marginal Cost

The change in total cost when producing one additional unit of a product or service in the long term, where all inputs are considered variable.

Economies of Scale

Enterprises gain cost benefits from their operation size, as the cost for each unit produced typically drops when the scale enlarges because fixed expenses are distributed across a greater number of output units.

Efficient Scale

The level of production at which a firm can produce its product at the lowest average cost per unit.

Economies of Scale

Economies of scale describe the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.