Question

If the marginal propensity to consume is 0.50​, how much would government spending have to rise to increase output by ​$10 comma 000 ​billion

Answer 1

$5,000 billion

Step-by-step explanation:

We know that

Government spending multiplier = 1 ÷ (1 - marginal propensity to consume)

Government spending multiplier = 1 ÷ (1 - 0.50)

Government spending multiplier = 1 ÷ 0.50

So, Government spending multiplier = 2

If the output is increased by $10,000 billion then, the government spending would rise by

= Output ÷ Government spending multiplier

= $10,000 ÷ 2

= $5,000 billion