If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion at each price level by:
A)increasing government spending by $4 billion.
B)increasing government spending by $40 billion.
C)decreasing taxes by $4 billion.
D)increasing taxes by $4 billion.

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is 0.1, so the marginal propensity to consume (MPC) is 0.9. The spending multiplier is 1/(1-MPC) = 1/0.1 = 10. To shift the aggregate demand by $40 billion, government spending needs to increase by $40 billion / 10 = $4 billion.

If the MPS in an Economy Is