Refer to the following figure to answer the following questions.
-According to the figure,and assuming the marginal propensity to consume is 0.75,to shift aggregate demand enough to be back at long-run equilibrium,the government would have to increase government spending by
A) $20 billion.
B) $10 billion.
C) $5 billion.
D) $1 billion.
E) $500 million.

Question

Refer to the following figure to answer the following questions. 
-According to the figure,and assuming the marginal propensity to consume is 0.75,to shift aggregate demand enough to be back at long-run equilibrium,the government would have to increase government spending by
A) $20 billion. 
B) $10 billion. 
C) $5 billion. 
D) $1 billion. 
E) $500 million.

Quizplus · Accepted Answer

The spending multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. To shift aggregate demand by $20 billion, government spending must increase by $20 billion / 4 = $5 billion.

Refer to the Following Figure to Answer the Following Questions