Assume that the MPC is 0.75. Full employment is considered to be at a GDP level of $500 billion. The GDP is $600 billion. What should the government do to achieve full employment?
A) increase spending by $25 billion
B) increase spending by $10 billion
C) reduce spending by $25 billion
D) reduce spending by $100 billion

Question

Quizplus · Accepted Answer

To reduce GDP from $600 billion to $500 billion, a decrease of $100 billion is needed. With an MPC of 0.75, the multiplier is 4 (1/(1-0.75)). Therefore, the government should reduce spending by $25 billion (100/4) to achieve full employment.

Assume That the MPC Is 0