In a certain economy in 2006, consumption was described by relationship C = C0 + MPC (Y-T), with the consumption function intercept equal to 100 and the spending multiplier equal to 5. Investment was 300 and government spending on final goods and services was equal to 100. Also, the government budget had a surplus of 100. Net exports were zero.
Suppose that the economy falls into a recession and that policymakers estimate that the output gap is 100. The country's policymakers decide to use Keynesian demand management policy to try to get to full employment. How much should government spending change?
Note: Ignore the crowding-out effect.
• Increase government spending by 20.
• Increase government spending by 80.
• Increase government spending by 100.
• Increase government spending by 50.