If the government spends an extra $5 billion on goods and services, GDP will:

Question

BlackTom AI · Accepted Answer

When evaluating how a government spending increase affects GDP, it's important to consider the mechanism by which spending circulates through the economy. 
Option 1: "increase by more than $5 billion." This reflects the spending multiplier concept: initial government expenditure raises income, which leads to additional consumption and further rounds of spending, so the total GDP rise can exceed the initial $5 billion if there are idle resources and a marginal propensity to consume above zero.
Option 2: "increase by $5 billion." This would be true only if the multiplier were exactly 1, meaning every dollar of government spending is matched by a dollar of total increase in GDP through offsetting factors. In a typical macro framework with positive marginal propensity to consume, the multiplier is greater than 1, so this option incorrectly understates the total impact.
Option 3: "increase by less than $5 billion." This would occur if there were leakages (such as increased spending on imports or saving) that absorb some of the initial injection before it circulates through the domestic economy. While such leaks exist, they do not normally imply the total GDP rise would be smaller than the initial impulse in a simple multiplier framework with domestic focus, unless there are unusual constraints. 
Option 4: "remain unchanged." This ignores the basic mechanism by which government purchases inject demand into the economy, so it clearly misstates the immediate effect of increased fiscal spending.
In short, the reasoning relies on the multiplier idea: government spending adds to overall demand, and because the newly earned incomes are partially spent again, the total rise in GDP typically exceeds the initial $5 billion amount, barring extreme leakage or other counteracting forces.

If the government spends an extra $5 billion on goods and services, GDP will:

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