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23 November, 05:44

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

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Answers (1)
  1. 23 November, 07:38
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    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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Home » Business » 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.
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