Assume the economy is in recession, the MPC is 0.80, and an increase of $200 billion in spending is needed in order to reach full employment. The target can be reached if government spending is increased by:
A) $20 billion.
B) $200 billion.
C) $80 billion.
D) $40 billion.

Question

Quizplus · Accepted Answer

Given the MPC (marginal propensity to consume) is 0.80, the multiplier effect is 1/(1-MPC) = 1/(1-0.80) = 5. To achieve a $200 billion increase in spending, the government needs to spend $200 billion / 5 = $40 billion.

Assume the Economy Is in Recession, the MPC Is 0