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?
A)a decrease of $12 billion
B)an increase of $25 billion
C)an increase of $10 billion
D)an increase of $15 billion

Question

Quizplus · Accepted Answer

To find the change in aggregate expenditures needed, use the formula: Change in Income = Multiplier x Change in Expenditures. The multiplier is 1/(1-MPC) = 1/(1-0.625) = 2.67. The change in income needed is $240 billion - $200 billion = $40 billion. Therefore, $40 billion = 2.67 x Change in Expenditures, so Change in Expenditures = $40 billion / 2.67 ≈ $15 billion.

Assume the Current Equilibrium Level of Income Is $200 Billion