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18 January, 04:02

If the economy experiences a recession with a current spending gap $1,000 below full-employment output, and the marginal propensity to consume is 0.8, how much must government increase spending to restore the economy to full-employment GDP?

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  1. 18 January, 05:25
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    Change in Investment (Government Spending) = $200

    Explanation:

    Multiplier = k = ∆Y/∆I = 1 / (1-MPC)

    Needed ∆Y = $1000; MPC = 0.8

    1000 / ∆I = 1 / (1-0.8)

    1000/∆I = 1 / 0.2

    1000/∆I = 5

    ∆I = 1000/5

    ∆I = 200
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