Assume That the Marginal Propensity to Consume Is 0

question 260

Multiple Choice

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output the government should:

• A)decrease spending by $50 billion.
• B)increase spending by $50 billion.
• C)decrease transfers by $50 billion.
• D)decrease spending by $10 billion.