The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?
a. $100 billion
b. $80 billion
c. $20 billion
d. $10 billion
Answer：C
Answer (c) is correct because the country needs an additional $100 million dollars in gross domestic product (GDP) to produce full employment.If the marginal propensity to consume (MPC) is 0.8, the marginal propensity to save (MPS) is 0.2 (1.0 – 0.8). Usingthe multiplier we can solve for the needed additional spending as presented below:
1MPS 10.2 × Increase in spending = $100 billion
Increase in spending = $20 billion
Answer (a), (b), and (d) are incorrect because they represent incorrect computations of the needed increase in spending.