Question

) If the marginal propensity to consume is 0.5, find by how much government

Spending would have to rise in order to raise output by Kes 1,000 billion

Answer 1

$\bold {Answer}$

Government spending should have to rise by $KES \space 500 \space billion$

$\bold {Solution}$

It is given that:

$MPC = 0.5$

$∆Y = KES \space 1,000 \space billion$

Then,

The expenditure multiplier,

$k = \dfrac {1}{1-MPC}$

$= \dfrac {1}{1-0.5}$

$= \dfrac {1}{0.5}$

$= 2$

$\therefore \space ∆G × k = ∆Y$

$=> ∆G × 2 = KES \space 1,000 \space bn$

$=> ∆G = \dfrac {KES \space 1,000 \space bn}{2}$

$= \bold {KES \space 500 \space billion}$

Thus, government spending should rise by KES 500 billion.