Exhibit 20A-4 Macro AD/AS Model

-As shown in Exhibit 20A-4,assume the marginal propensity to consume MPC equals 0.80.Using discretionary fiscal policy,federal government spending should be ____ in order to restore the economy from E₁ to full employment.
A) increased by $1.6 trillion
B) decreased by $1.6 trillion.
C) increased by $.20 trillion,
D) increased by $.20 trillion
E) increased by $.80 trillion

Question

Exhibit 20A-4 Macro AD/AS Model
 
-As shown in Exhibit 20A-4,assume the marginal propensity to consume MPC equals 0.80.Using discretionary fiscal policy,federal government spending should be ____ in order to restore the economy from E₁ to full employment.
A) increased by $1.6 trillion 
B) decreased by $1.6 trillion. 
C) increased by $.20 trillion, 
D) increased by $.20 trillion 
E) increased by $.80 trillion

Quizplus · Accepted Answer

The correct answer is A because the marginal propensity to consume (MPC) is 0.80, which means that for every $1 increase in government spending, $0.80 will be spent by consumers. Therefore, in order to restore the economy from E₁ to full employment, government spending should be increased by $1.6 trillion (1/0.80 = $1.6 trillion).