In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment. If the MPC is. 9, then it could: A. Decrease taxes by $6 B. billion Decrease taxes by $12 C. billion Increase government spending by $6 D. billion Increase government spending by $12 billion

Question

Melissa Mcdowell

Business

28 March, 05:58

In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment. If the MPC is. 9, then it could: A. Decrease taxes by $6 B. billion Decrease taxes by $12 C. billion Increase government spending by $6 D. billion Increase government spending by $12 billion

+1

Answers (1)

Know the Answer?

Ellie Barr · Answer 1

Option (C) is correct.

Explanation:

Given that,

Desired increase in aggregate demand = $60

Marginal propensity to consume (MPC) = 0.9

Spending multiplier = 1 : (1 - MPC)

= 1 : (1 - 0.9)

= 1 : (0.1)

= 10

Therefore,

Increase in government spending:

= Desired increase in aggregate demand : Spending multiplier

= $60 : 10

= $6