Figure 11-1

-In Figure 11-1, the slope of the expenditures schedule is .75 and the government wishes to achieve full employment.It should
A)cut spending by 1,000.
B)increase spending by 1,000.
C)cut taxes by 1,000.
D)increase spending by 250.
E)cut taxes by 250.

Question

Figure 11-1
 
-In Figure 11-1, the slope of the expenditures schedule is .75 and the government wishes to achieve full employment.It should
A)cut spending by 1,000. 
B)increase spending by 1,000. 
C)cut taxes by 1,000. 
D)increase spending by 250. 
E)cut taxes by 250.

Quizplus · Accepted Answer

To achieve full employment, the government needs to increase aggregate demand which can be done by increasing government spending. The slope of the expenditures schedule tells us that every 1 unit increase in government spending leads to a 0.75 unit increase in real GDP. Therefore, to increase real GDP by 1 unit, government spending should be increased by 1/0.75 = 1.33 units. Since the question asks for a 1,000-unit change, the government should increase spending by 1,000/1.33 = 751.88 which is closest to answer choice D: increase spending by 250.

Figure 11-1 -In Figure 11-1, the Slope of the Expenditures Schedule Is