Question

The economy is in a recession, whereby a $300 billion dollar rightward shift of the aggregate demand curve would bring it out of recession. If the marginal propensity to consume (MPC) is 0.7 and there is no crowding out, how much should Congress increase G to end the recession?

Answer 1

Answer:

Change in G = $90 billion

Explanation:

Data provided in the question:

Shift in demand curve, ΔY = $300 billion

Marginal propensity to consume (MPC) = 0.7

Now,

Government spending multiplier

⇒ ΔY ÷ ΔG = 1 ÷ ( 1 - MPC )

or

⇒ $300 billion ÷ ( Change in G ) = 1  ÷ ( 1 - 0.7 )

or

Change in G = $300 billion × ( 1 - 0.7 )

or

Change in G = $300 billion × 0.3

or

Change in G = $90 billion