If the MPC in the economy is .75,government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion.

Question

Quizplus · Accepted Answer

If the MPC (marginal propensity to consume) in the economy is 0.75, then for every $1 decrease in taxes, consumers will spend $0.75 more. So, a $10 billion tax cut will increase aggregate spending by $7.5 billion (0.75 x $10 billion). Using the spending multiplier formula (1/MPS), we can determine that a $7.5 billion increase in spending will increase equilibrium output by $30 billion (4 x $7.5 billion). Therefore, the government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion, as stated in the question.

If the MPC in the Economy Is