Question

I got this question wrong on a test and I'd like to know how to do it (I already know what the answer is, but I want to know how to get that answer so I can properly solve these problems in the future).

Answer 1

If real GDP is $300 billion, full employment GDP is $400 billion, and the marginal propensity to consume is 0.5, then Congress should:
A. Decrease taxes by $50 billion
B. Increase purchases by an amount slightly more than $100 billion
C. Decrease purchases by $100 billion
D. Decrease taxes by $100 billion
E. Decrease purchases by $50 billion