A country's real GDP level is $800 billion, and its full-employment real GDP level is $920 billion. If the MPC = 2/3 and the full potential expenditure multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?
A) Government purchases are decreased by $20 billion.
B) Government purchases are increased by $60 billion.
C) Government purchases are increased by $120 billion.
D) Government purchases are increased by $40 billion.

Question

Quizplus · Accepted Answer

The expenditure multiplier is 1/(1-MPC) = 3. To close the $120 billion GDP gap, government purchases should increase by $40 billion (since $40 billion * 3 = $120 billion).

A Country's Real GDP Level Is $800 Billion, and Its