Question

suppose that there are no crowding out effects and the mpc is .9. by how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion

Answer 1

Answer: The answer is $ 1 billion.

Explanation:

MPC stands for the marginal propensity to consume.

If MPC is 9 it implies that the multiplier is 10 i.e 1/(1-0.9). The rise in aggregate demand is equal to multiplier times change in government expenditures so to boost aggregate demand by 10 billion dollar government has to increase expenditure by Dollar 1 billion.