the full employment level of income is 1000. the economy is currently at equilibrium of 800....

the full employment level of income is 1000. the economy is currently at equilibrium of 800. the mpc is .9. government spending _____ of ______would be sufficient to move the economy to full employment

Expert Solution

Ans. First we shall calculate the multiplier

Multiplier = 1/1-MPC = 1/ 1 - 0.9 = 1/ 0.1 = 10

Thus for every $1 spent by government, the output will increase by $10.

So in order to achieve equilibrium, we need $200 increase in output which can be done by increasing govt spending by $20 (as multiplier is 10).

First blank - increase

Second blank - $20

Rahul Sunny answered 2 years ago

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