In a simple macro model with government and demand- determined output, to raise equilibrium national income by $100 billion, G must be
A)raised by $100 billion divided by the simple multiplier.
B)raised by $100 billion times the simple multiplier.
C)raised by $100 billion.
D)lowered by $100 billion divided by the simple multiplier.
E)lowered by $100 billion times the simple multiplier.

Question

Quizplus · Accepted Answer

According to the simple spending multiplier formula, the change in equilibrium output is equal to the initial change in autonomous spending (in this case, government spending) multiplied by the multiplier. Therefore, to raise equilibrium national income by $100 billion, we need to calculate the simple multiplier, which is equal to 1 divided by the marginal propensity to save (MPS). Then, G must be raised by $100 billion divided by the simple multiplier to achieve the desired increase in national income.

In a Simple Macro Model with Government and Demand- Determined