Question

Assume that the full-employment level of output is $2,000 and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $1,900 and, at the price level of 100, current aggregate demand is $1,850. If the government moves the economy back to the full-employment level of output by increasing government purchases by $30, then the MPC equals:a. 0.8.b. 0.75.c. 0.6.d. 0.5.

Answer 1

Answer:

The correct answer is option a.

Explanation:

The full-employment level of output is $2,000.

The current level of output is $1,900.  

The current aggregate demand is $1,850.  

There is a need to increase the aggregate demand by $150 to reach full employment level.  

The government increases purchasing by $30.  

$Increase\ in\ income\ =\ Change\ in\ government\ spending\ \times\ spending\ multiplier$

$\ 150\ =\ \ 30\ \times\ \frac{1}{1-MPC}$

$\ 5 = \frac{1}{1-MPC}$

1 - MPC = $\frac{1}{5}$

MPC = 1 - 0.2

MPC = 0.8