Question

g Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter your answers as positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion

Answer 1

Answer: $5 billion

Explanation:

First find the spending multiplier which is a multiplier that shows how Aggregate demand increases as a result of additional spending.

Multiplier = 1 / (1 - Marginal propensity to consume)

= 1 / ( 1 - 0.8)

= 5

If the government wants to raise Aggregate demand by $25 billion, they should spend:

Increase in AD = Amount * Multiplier

25 billion = Amount * 5

Amount = 25 / 5

= $5 billion