Suppose the marginal propensity to consume is 0.75. A $150 billion increase in government spending shifts the IS curve

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.75, which means for every additional dollar received, consumers will spend 75 cents. The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. A $150 billion increase in government spending, multiplied by the multiplier of 4, results in a total increase in aggregate demand of $600 billion, shifting the IS curve to the right by $600 billion.

Suppose the Marginal Propensity to Consume Is 0