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As an elected official, you have been informed that real gdp is below its potential and that action should be taken to encourage economic growth and bring the economy to its long-run equilibrium. if the marginal propensity to consume is 0.8 and the amount of new government spending is $600 billion, by how much would the economy be stimulated

Respuesta :

To find the answer, we first calculate the multiplier.

By using the equation,

ms= 1 ÷ (1 – MPC)

MPC = marginal propensity to consume = 0.8

ms= 1 ÷ (1 – MPC) = 1 ÷ (1 - 0.8)

= 5

Thus, the multiplier is 5.

An increase in government spending = $600 billion

Now, multiplied $600 billion by the multiplier, which is 5.

$600 billion x 5

= $3,000

Thus, the answer is $3,000 billion increase in real GDP.

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