Question

The country of Micronesia is currently experiencing a recessionary gap. The size of the recessionary gap is $500 billion. If the marginal propensity to consume is .8, how much will the government need to spend to get the economy to full employment? brainly

Answer 1

Answer:

The appropriate solution is "100 billion".

Explanation:

The given values are:

Recessionary gap (Total change),

= $500

Marginal propensity consume (MPC),

= 0.8

Now,

Multiplier will be:

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

On putting the value of MPC, we get

= $\frac{1}{1-0.8}$

= $5$

As we know,

⇒ $Total \ change=Government \ spending's \ increase\times Multiplier$

⇒ $Government \ spending's \ increase=\frac{Total \ change}{Multiplier}$

On substituting the values, we get

⇒                                                       $=\frac{500}{5}$

⇒                                                       $=100 \ billion$