Question

Suppose the economy is in a recession. The economy needs to expand by at least $300 billion, and the marginal propensity to consume is 0.6 . What is the least amount the government can spend to overcome the $300 billion gap? $_______ bilion

Answer 1

The government would need to spend at least $500 billion to overcome the $300 billion gap and stimulate economic growth during a recession.

Step-by-step explanation:

To close the $300 billion gap in the economy during a recession, the government needs to increase spending by a specific amount. We can use the multiplier effect to calculate the amount of government spending required to close this gap. The multiplier effect shows how changes in government spending can impact overall economic output or GDP. In this case, the marginal propensity to consume (MPC) is given as 0.6, which means that for every additional dollar earned, individuals consume 60% of it.

The formula to calculate the spending needed to close the gap is:
Spending needed = (Desired increase in GDP) / (MPC)

Plugging in the values:
Spending needed = $300 billion / 0.6
Spending needed = $500 billion

Therefore, the government would need to spend at least $500 billion to overcome the $300 billion gap and stimulate economic growth during a recession.