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As an elected official, you have been informed that real GDP is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. If the marginal propensity to consume is 0.8 and the amount of new government spending is $600 billion, by how much would the economy be stimulated? A. $3,000 billion B. –$3,000 billion C. $600 billion D. –$600 billion E. $480 billion

Answer :

Answer:

The correct answer is option A.

Explanation:

An economy is operating below its potential level.  

The marginal propensity to consume is 0.8.

The amount of new government spending is $600 billion.  

The change in the GDP will depend on the size of the spending multiplier.  

ΔGDP  

= [tex]\frac{1}{1-MPC}\ \times\ \Delta G[/tex]

= [tex]\frac{1}{1-0.8}\ \times\ 600[/tex]

= [tex]\frac{1}{0.2}\times\ 600\[/tex]

= $3,000 billion

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