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Nookie1986 [14]
3 years ago
5

If the economy experiences a recession with a current spending gap $1,000 below full-employment output, and the marginal propens

ity to consume is 0.8, how much must government increase spending to restore the economy to full-employment GDP?
Business
1 answer:
gtnhenbr [62]3 years ago
5 0

Answer:

Change in Investment  (Government Spending) = $200

Explanation:

Multiplier = k =∆Y/∆I = 1/(1-MPC)

Needed ∆Y = $1000  ;  MPC = 0.8

1000/ ∆I = 1 / (1-0.8)

1000/∆I  = 1 / 0.2

1000/∆I  = 5

∆I  = 1000/5

∆I = 200

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