Question

Suppose the economy is in a recession. The economy needs to expand by at least $350 billion, and the marginal propensity to consume is 0.6. What is the least amount the government can spend to overcome the $350 billion gap

Answer 1

$140

Step-by-step explanation:

Calculation for What is the least amount the government can spend to overcome the $350 billion gap

First step is to find the Multiplier using this formula

Multiplier=1(1-Marginal propensity)

Let plug in the formula

Multiplier=1/(1-0.6)

Multiplier=1/0.4

Multiplier=2.5

Now let calculate the least amount the government can spend using this formula

Least amount=Gap/Multiplier

Let plug in the formula

Least amount=$350 billion /2.5

Least amount=$140

Therefore the least amount the government can spend to overcome the $350 billion gap is $140