If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____ .
A)decrease; $100 billion
B)decrease; $60 billion
C)decrease; $40 billion
D)increase; $100 billion

Question

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC), which is 1/(1-0.6) = 2.5. To decrease GDP by $100 billion, government purchases should be decreased by $100 billion / 2.5 = $40 billion.

If Policy Makers Want to Decrease Real GDP by $100