Refer to the following figure to answer the following questions.
-According to the figure,if the government increases spending by only $4 billion in an effort to shift aggregate demand enough to return to long-run equilibrium,the marginal propensity to consume must be equal to
A) 0.75.
B) 0.8.
C) 1.33.
D) 1.57.
E) 0.6.

Question

Refer to the following figure to answer the following questions. 
-According to the figure,if the government increases spending by only $4 billion in an effort to shift aggregate demand enough to return to long-run equilibrium,the marginal propensity to consume must be equal to
A) 0.75. 
B) 0.8. 
C) 1.33. 
D) 1.57. 
E) 0.6.

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) can be calculated using the spending multiplier formula, which is 1/(1-MPC). To achieve a specific shift in aggregate demand, the multiplier effect of the increased government spending must match the required change. Given the options, an MPC of 0.8 would result in a multiplier of 5 (1/(1-0.8) = 5), which is a common scenario for achieving significant shifts in aggregate demand with relatively small changes in government spending.

Refer to the Following Figure to Answer the Following Questions