Econia's real GDP is $600 billion. Full-employment real GDP is $900 billion. The MPC = .8. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?
A) Increase government purchases by $50 billion.
B) Increase government purchases by $60 billion.
C) Decrease government purchases by $80 billion.
D) Decrease government purchases by $240 billion.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.8) = 5. To close the GDP gap of $300 billion ($900 billion - $600 billion), the government needs to increase spending by $300 billion / 5 = $60 billion.

Econia's Real GDP Is $600 Billion