You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The Chairperson of the CEA tells you that she believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. She wants to know what policy to pursue to increase aggregate output by $500 billion. The best estimate she has for the MPC is 0.5. Which of the following policies should you recommend?

Question

Quizplus · Accepted Answer

With an MPC of 0.5, the government spending multiplier is 1/(1-MPC) = 2. To increase output by $500 billion, government purchases should increase by $250 billion (since $250 billion * 2 = $500 billion).

You Are Hired by the Council of Economic Advisors (CEA)