Question

Suppose the economy is in a recession. The economy needs to expand by at least $450 billion, and the marginal propensity to consume is 0.9.


What is the least amount the government can spend to overcome the $450 billion gap?

Answer 1

Answer:

$45 billion

Explanation:

As per the data given in the question,

Marginal propensity to consume(MPC) = 0.9

Multiplier = 1 ÷ (1-MPC)

= 1 ÷ (1-0.9)

= 1 ÷ 0.1

= 10

Required change in money supply = $450 billion

Investment needed = Expansion ÷ Multiplier

= $450 ÷ 10

= $45 billion

Therefore, Least amount which can be spent by government to overcome the $450 billion gap = $45 billion