Last year, Kurt invested $1,000 in ABC stock, $1,000 in long-term government bonds, and $1,000 in U.S. Treasury bills. Over the
course of the year, he earned returns of 10.3 percent, 8.8 percent, and 4.3 percent, respectively. What is the risk premium that Kurt received on his ABC stock investment?
1 answer:
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Answer:
(B) $20 billion
Explanation:
Given a certain level of MPC, an increase in government spending (G) by a certain amount translates to an increase in aggregate demand (AD) through the relationship below.
where Δ means <em>change.</em>
<em />
Therefore, given ΔAD of $50 billion, and MPC of 0.6,
=
=
= ΔG = 50 * 0.4 = 20
Therefore, increase in government purchases = $20 billion.