Question

Supppose that an increase of $200 billion in real GDP is needed to bring an economy with an MPC of 0.8 to full employment. There are no taxes or trade, and the price level is constant.

How much will government spending on transfer payments needed to be increased to bring the economy to full employment?

Answer 1

To bring the economy to full employment, an increase in government spending on transfer payments is needed.

Step-by-step explanation:

The Keynesian policy prescription has one final twist. To bring the economy to full employment, an increase in government spending on transfer payments is needed. The increase in real GDP required to reach full employment is $200 billion. However, due to the multiplier effect, the increase in government spending needs to be larger than $200 billion to have the desired impact on the equilibrium level of real GDP.