In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment. If the MPS is 0.4, then it could increase government spending by:

Question

Quizplus · Accepted Answer

The spending multiplier is 1/MPS, which is 1/0.4 = 2.5. To increase aggregate demand by $50 billion, the government should increase spending by $50 billion / 2.5 = $20 billion.

In an Economy, the Government Wants to Increase Aggregate Demand