Suppose the economy is in longrun equilibrium when GDP decli

Suppose the economy is in long-run equilibrium when GDP declines by $50 billion. The government wants to increase its spending in order to stimulate the economy and avoid a recession. Assume that the crowding-out effect is always half as strong as the multiplier effect, and the MPC equals 0.9. According to Keynesian theory, how much additional government spending is needed to restore economic output?

A.  $10 billion B.  $100 billion C.  $50 billion D.  $45 billion

Suppose the economy is in long-run equilibrium when GDP declines by $50 billion. The government wants to increase its spending in order to stimulate the economy and avoid a recession. Assume that the crowding-out effect is always half as strong as the multiplier effect, and the MPC equals 0.9. According to Keynesian theory, how much additional government spending is needed to restore economic output?

A.  $10 billion B.  $100 billion C.  $50 billion D.  $45 billion

Solution

A.  $10 billion (Explanation: 1/1-MPC)