Question

If the mps in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by question 3 options: increasing government spending by $4 billion. increasing government spending by $40 billion. decreasing taxes by $4 billion. increasing taxes by $4 billion.

Answer 1

Answer:

increasing government spending by $4 billion.

Explanation:

A rightward shift of aggregate demand means that aggregate demand is increasing.

When the government increases spending, the effect on aggregate demand is given by ⇒ total change in spending x government spending multiplier

• total change in spending = $4 billion
• government spending multiplier = 1 / MPS = 1 / 0.1 = 10

effect on aggregate demand = $4 billion x 10 = $40 billion