2013 AICPA Question

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  • May 12, 2013 at 5:57 am #177452
    flop310
    Member

    Hello,

    I am having trouble figuring out this question. Please help.Thank you!

    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

    Explanation

    Choice “c” is correct.

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  • May 12, 2013 at 6:51 am #412098
    Futile
    Member

    GDP under the expenditures approach is made up of Personal Consumption + Domestic Business Investment + Government Purchases + Net Exports.

    The Marginal Propensity to Consume is what fraction of an additional dollar a consumer will spend (as opposed to save).

    To produce full-employment, actual GDP has to increase by $1.3 trillion – $1.2 trillion = $100 billion. Consumers would have to spend an additional $100 billion x .8 = $80 billion. This leaves $20 billion ($100 billion – $80 billion) to be made up by the government.

    CPA exam: Done!

    Thank You, Lord.

    May 12, 2013 at 5:21 pm #412099
    flop310
    Member

    Perfect.. Thank you!

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