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In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment. If the MPC is .9, then it could: A. Decrease taxes by $6 B. billion Decrease taxes by $12 C. billion Increase government spending by $6 D. billion Increase government spending by $12 billion

Respuesta :

Answer:

Option (C) is correct.

Explanation:

Given that,

Desired increase in aggregate demand = $60

Marginal propensity to consume (MPC) = 0.9

Spending multiplier = 1 ÷ (1 - MPC)

                                 = 1 ÷ (1 - 0.9)

                                 = 1 ÷ (0.1)

                                 = 10

Therefore,

Increase in government spending:

= Desired increase in aggregate demand ÷ Spending multiplier

= $60 ÷ 10

= $6

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