ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The mpc is .8. The economy is $400 billion short of full employment. The government should
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increase the reserve ratio by 20%.
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decrease government spending by $40 billion.
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increase taxes by $80 billion.
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increase government spending by $80 billion.
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decrease taxes by $80 billion.
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Explanation:
Detailed explanation-1: -Multiplier(k) = 1/ (1-MPC) = 1/(1-0.8) = 1/0.2= 5.
Detailed explanation-2: -MPC is the money people spend when they get an extra dollar of income. When MPC = 0.8, for example, when people gets an extra dollar of income, they spend 80 cents of it.
Detailed explanation-3: -If the MPC is 0.9 and investment spending increases by $20 billion, real GDP will increase by $200 billion.
Detailed explanation-4: -If the marginal propensity to consume is 0.80, the value of the spending multiplier will be 4. The size of the spending multiplier depends on the level of real GDP. An increase in the marginal propensity to consume (MPC) leads to a increase in the spending multiplier.
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