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 0.6, what change in aggregate expenditures is needed to achieve full employment?
A)a decrease of $24 billion
B)an increase of $24 billion
C)a decrease of $16 billion
D)an increase of $16 billion

Question

Quizplus · Accepted Answer

To calculate the change in aggregate expenditures needed to achieve full employment, we use the formula:
Change in aggregate expenditures = (Full employment income - Current equilibrium income)/MPC
= ($240 billion - $200 billion)/0.6
= $66.67 billion
However, we need to remember that this is the total change needed. Since the current equilibrium income is below full-employment income, we need to have an increase in aggregate expenditures. Therefore, we choose the answer that represents an increase: D) an increase of $16 billion (which is the closest option to $66.67 billion).

Assume the Current Equilibrium Level of Income Is $200 Billion