Answer: $120 billion
Explanation:
Fron the question, we are told that an economy is in a recession and needs to expand by at least $300 billion, and the marginal propensity to consume is 0.6.
The least amount the government can spend to overcome the $300 billion gap goes thus:
Since MPC = 0.6, then the multiplier will be:
= 1/(1-MPC)
= 1/(1-0.6)
= 1/0.4
=2.5
We are also informed that the required change in the money supply is $300 billion. Then, the investment needed will be:
= Expansion/Multiplier
= $300 billion/2.5
= $120 billion
