The prime minister of richlandia hires you as an economic consultant. he is concerned that the output level in richlandia is too low and that this will cause unemployment to rise. he feels that it is necessary to increase output by $20 billion. he tells you that the mpc in richlandia is 0.75. which of the following would be the best advice to give to the richlandian prime minister?
a) increase government purchases in richlandia by $15 billion
b) reduce taxes in richlandia by $10 billion
c) increase government purchases in richlandia by $5 billion
d) reduce taxes in richlandia by $4 billion
Ask the speaker for outside evidence that supports his claims.
Explanation: The speaker has conducted studies that may or may not be biased. You’ll need outside evidence to fully evaluate his claims.
Vulcan economy :
MPC = 0,6
Reduce Output by $10 billion.
To find the number that will have a negative impact in the economy of 10 billion, we need a number that multiply by the multiplier gives 10 billion.
The multiplier will be
1 / (1- MPC) =
1 / (1- 0,6) =
1 / 0,4 =
Then the Vulcan economy need to reduce goverment purchases by $4 billion.
The solution is as follows: 2,5 (multiplier) * $4 billion = $10 billion of decrease in the GDP