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Suppose the economy is in a recession. The economy needs to expand by at least $400 billion, and the marginal propensity to consume is 0.7. What is the least amount the government can spend to overcome the $400 billion gap?

Answer :

Answer: $120 billion

Explanation: A recession occurs when there is a reduction in economic activities. One way to solve the issue of recession is through government expenditure.

With regards to the question, MPC = 0.7

To overcome the $400 billion gap, government will spend= 400 × (1 - MPC)

= 400 × (1 - 0.7)

= 400 × 0.3

= 120

For the government to overcome the $400 billion gap in the economy, the government has to spend at least $120billion.

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