Answered: The level of AD needed to achieve full…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The level of AD needed to achieve full employment is $150 billion. The current level of Real GDP (output) is $100 billion. A $5 billion increase in government spending closes the gap and restores FullEmployment. What is the Marginal Propensity to Consume?

Expert Solution

Step 1

Answer -

Marginal Propensity of Consume :- It is the rate of change in the consumption with change in the income or output

Formula of Marginal Propensity of Consume -

MPC = dC/dY

Given in the question -

Level of full employment = $150 billion

Current out put level = $100 billion

Government spending G = $5 billion

Now

Government spending Multiplier = Change in GDP/ Change in Government spending

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