Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand
A)shifts rightward by $62.5 billion.
B)shifts rightward by $50.0 billion.
C)shifts rightward by $32.5 billion.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.60) = 2.5. So, a $25 billion increase in government spending will increase aggregate demand by $25 billion x 2.5 = $62.5 billion.

Suppose That the MPC Is 0