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The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?A. $6 billion
B. $8 billion
C. $10 billion
D. $16 billion

Respuesta :

Answer:

C. $10 billion

Explanation:

The computation of the full increase in real GDP is presented below:

Given that

Increase in government spending = $2 billion

MPS = 0/2

We know that

Multiplier = One ÷ MPS

               = 1 ÷ 0.2

               = 5

So, the full increase in real GDP would be

= Multiplier × increase government spending

= 5 × $2 billion

= $10 billion

Answer:

The correct answer is Option C, $10 billion

Explanation:

We have given that MPS is 0.2.

  • Then the increase in government spending is $2 billion.
  • The horizontal supply curve means that the price level is constant.
  • The increase in real GDP will be  equal to the change in government spending government spending multiplier

[tex]=2\ billion$\times\frac{1}{M P S}$[/tex]

[tex]=2\ billion $\times \frac{1}{0.2}$[/tex]

[tex]=2\ billion $\times 5$[/tex]

= $10 billion

Learn more about GDP, refer:

  • brainly.com/question/15899184

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