given our MPC of .80 and our necessary increase in GDP of $500, how much should we increase government spending to fix the issue?

Answer 1

To determine the necessary increase in government spending to achieve the desired increase in GDP, we can use the formula:

Change in GDP = MPC * Change in Government Spending

Given that the MPC (Marginal Propensity to Consume) is 0.80 and the necessary increase in GDP is $500, we can substitute these values into the formula:

$500 = 0.80 * Change in Government Spending

Now, we can solve for the change in government spending:

Change in Government Spending = $500 / 0.80 ≈ $625

Therefore, to fix the issue and achieve the desired increase in GDP of $500, the government should increase its spending by approximately $625.