The King of Rococo hires you as an economic consultant. He is concerned that the output level in Rococo is too high and that this will cause prices to rise. He feels that it is necessary to reduce output by $100 billion. He tells you that the MPC in Rococo is 0.9. Which of the following would be the best advice to give to the King of Rococo?

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 10. To reduce output by $100 billion, government spending should be reduced by $10 billion (since $10 billion * 10 = $100 billion).

The King of Rococo Hires You as an Economic Consultant