Question

The American Recovery and Reinvestment Act introduced a large amount of government spending into the economy—$789 billion! Suppose the marginal propensity to consume in the United States is 0.85. How much would the program increase total spending in the economy?

Answer 1

Answer:

$5,262.63

Explanation:

The computation of the program increase in total spending in economy is shown below:

But before that we need to find out the government spending multiplier is '

= 1 ÷ (1 - MPC)

= 1 ÷ (1 - 0.85)

= 6.67

Now

The increase in total spending is

= increase in spending × spending multiplier

= $789 billion × 6.67

= $5,262.63

Hence it would be increased by $5,262.63