Question

Assume that the MPC is 0.75. Full employment is considered to be at a GDP level of $500 billion. The GDP is $600 billion. What should the government do to achieve full employment

Answer 1

Answer:

lower government spending by $25 billion

Explanation:

marginal propensity to save = 1 - 0.75 = 0.25

the multiplier of government spending = 1 / MPS = 1 / 0.25 = 4

since the GDP is $100 billion over full employment level, the government must decrease the GDP by that number ($100 billion), t can do it by decreasing spending by $25 billion ⇒ net effect will be -$25 billion x government spending multiplier = -$25 billion x 4 = -$100 billion

Answer 2

Answer:please refer to the explanations section

Explanation:

Marginal Propensity to consume (mpc) = 0.75 which tells us that marginal propensity to save = 1 - 0.75 = 0.25

Multiplier = 1/mps =1/0.25 = 4

Full employment is considered to be at a GDP level of $500, GDP is currently at $600 billion.

GDP must decrease by $1 billion to achieve full employment

The Government must reduce government spending by 2500000 000 (1 billion/4)

When the Government reduces spending by 250 0000 000, with the multiplier effect of 4 the GDP will decrease by 250 0000 000 x 4 which is  $1 Billion.