The equilibrium level of real GDP is $1,000, the target full-employment level of real GDP is $1,500, and the marginal propensity to consume is 0.75. The target can be reached if government spending is:
A) increased by $100 billion.
B) increased by $125 billion.
C) increased by $500 billion.
D) held constant.

Question

Quizplus · Accepted Answer

To reach the target full-employment level of real GDP of $1,500, the economy needs to increase its output by $500 ($1,500 - $1,000). With a marginal propensity to consume of 0.75, every dollar of additional output will lead to an increase in consumption spending of $0.75. To achieve the target, the government needs to increase spending by the remaining $125 ($500 x 0.25), which is choice B.

The Equilibrium Level of Real GDP Is $1,000, the Target