Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP?
A) $300 decrease in taxes.
B) $75 increase in government spending.
C) $75 decrease in taxes.
D) $75 decrease in government spending.

Question

Quizplus · Accepted Answer

In order to reach full-employment output, the equilibrium real GDP needs to increase by $300 ($2,800 - $2,500). The government could increase spending by $75 (multiplied by the spending multiplier) which would increase real GDP by $300 and bring it to full-employment level. Decreasing taxes or decreasing government spending would not have as large of an impact on real GDP.

Given Full-Employment Output = $2,800, Equilibrium Real GDP = $2,500