The President of Vulcan hires you as an economic consultant. He is concerned that the output level in Vulcan is too high and that this will cause prices to rise. He feels that it is necessary to reduce output by $10 billion. He tells you that the MPC in Vulcan is 0.6. Which of the following would be the best advice to give to the Vulcan president?

Question

Quizplus · Accepted Answer

To reduce output by $10 billion with an MPC of 0.6, the government should reduce spending by an amount that, when multiplied by the spending multiplier (1/(1-MPC) = 2.5), equals $10 billion. Reducing government purchases by $4 billion, multiplied by the multiplier of 2.5, achieves this reduction in output.

The President of Vulcan Hires You as an Economic Consultant