Assume the MPC is 0.75,taxes increase by $100 billion,and government spending increases by $100 billion.Aggregate demand will

Question

Quizplus · Accepted Answer

Using the formula for the spending multiplier, the change in aggregate demand can be calculated as follows:

ΔAD = (1 / (1 - MPC)) x ΔSpending
ΔAD = (1 / (1 - 0.75)) x ($100 billion)
ΔAD = 4 x $100 billion
ΔAD = $400 billion

However, the question states that both taxes and government spending are increasing by $100 billion. Thus, the increase in government spending will be partially offset by the increase in taxes, resulting in a net increase in aggregate demand of only $100 billion.

Assume the MPC Is 0