Final answer:
A $500 million increase in government spending in the full Keynesian model with an MPS of 0.25 leads to a $2 billion increase in equilibrium output due to the multiplier effect of 4. This would typically decrease the unemployment rate, assuming the economy is not already at full employment.
Step-by-step explanation:
The question asks how a $500 million increase in government spending would impact the economy in a full Keynesian model with a marginal propensity to save (MPS) of 0.25. Given the MPS, we can calculate the multiplier effect using the formula (1/MPS).
This infusion of government spending would not lead to a decrease in aggregate demand, but rather an increase. There will be no change in equilibrium if the economy is already at full employment. However, assuming the economy is not at full employment, this increase in government spending would typically lead to a decrease in unemployment rate due to higher demand for labor as production expands to meet the increased spending.