Question

Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand a. shifts rightward by $100 billion. b. shifts rightward by $51 billion. c. shifts rightward by $170 billion. d. shifts rightward by $72.8 billion.

Answer 1

Answer:

a. shifts rightward by $100 billion

Explanation:

Step 1. Given information.

MPC = 0.7

Step 2. Formulas needed to solve the exercise.

Impact in the aggregate demand = 1 / (1-mpc) * total increase expenditures.

Step 3. Calculation.

Impact in the aggregate demand = 1 / (1-0.7) * 30 million = 100 billion

Step 4. Solution.

What actually occurs is that if government increases its expenditures, this means that the output levels in the economy will increase.

Thus, aggregate demand curve will shift right  the overall increase by 100 billions.