Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.90, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of 1,000 billion aggregate demand can restore full employment, the government should:
a. increase spending by 100 billion.
b. decrease spending by 790 billion.
c. increase spending by 1,000 billion.
d. increase spending by 250 billion.
Question 2
Monetary instability has been the major cause of economic instability in this country. Expansion in the money supply has been the source of every major inflation. Every major recession has been either caused or perpetuated by monetary contraction. Who among the following would most likely adhere to this view?
a. Monetarists.
b. Keynesians.
c. Demand-side economists.
d. Quantity theorists.
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