Answer to Question #8989 in Macroeconomics for moni
Suppose the Japanese government decides to increase government expenditures by 120. If the multiplier in the economy is 3 and the price level is constant, the AD curve would ultimately
shift out by 40
shift out by 120
shift out by 360
not shift at all because the price level is constant
Answer is shift out by 360.
The multiplier model assumes a constant price level. When expenditures are increased or decreased, they ultimately increase or decrease by more than the initial change, due to the multiplier. Thus, the price level remains unchanged, government expenditures increase by 120, so due to the multiplier (3) the AD curve would shift out by 360 (triple).