Question

ASAP!!!!!!!! Would give a lot of points!!!!!

Assume that the output gap is estimated to be $156 billion and the government decides to take action. If the marginal propensity to consume is 0.75, by how much would it need to change government spending to close the gap? Show your work.

Answer 1

$39 billion

Step-by-step explanation:

Given marginal propensity to consume is 0.75,

the Spending Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4

To close a gap of $156 billion, the government needs to change spending by $156 / Spending Multiplier

= $156 /4

= $39 billion