Question

Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment?

Answer 1

increase the aggregate expenditure to $15 billion ($40-$25)

to achieve full employment.

Step-by-step explanation:

Note:

If change in aggregate expenditures is equal to change in aggregate income then MPC=1.

Formula for MPC:

MPC=Change in Consumption or expenditure/ Change in Income

Given MPC=0.62

0.625=Change in Consumption or expenditure/ (240-200)

Change in Consumption or expenditure=
`0.625 * 40\\`

Change in Consumption or expenditure=$ 25 billion

Since the change in income is $40 billion($240-$200) and Change in aggregate expenditure we calculated above is $25 billion so we need to increase the aggregate expenditure to $15 billion ($40-$25)

to achieve full employment i.e to make MPC to 1.