If the government wishes to decrease GDP by $2,000 billion, and the MPC is 0.6, it should_______ its spending by _______ billion.
A) increase; $1,200
B) decrease; $1,200
C) increase; $800
D) decrease; $800

Question

Quizplus · Accepted Answer

To decrease GDP by $2,000 billion, the government needs to decrease its spending by a certain amount. We can use the expenditure multiplier formula to determine the required decrease in government spending:

Expenditure multiplier = 1/MPC 
Expenditure multiplier = 1/0.6 = 1.67

Change in GDP = Expenditure multiplier x Change in government spending 
Change in GDP = 1.67 x Change in government spending

We know that the change in GDP that the government wants is -$2,000 billion, so we can plug that in:

-$2,000 billion = 1.67 x Change in government spending

Solving for the change in government spending, we get:

Change in government spending = -$2,000 billion / 1.67 = -$1,198.80 billion

Rounded to the nearest billion, the answer is a decrease in spending by $1,200 billion, which corresponds to choice D.

If the Government Wishes to Decrease GDP by $2,000 Billion