Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the
A)left by $24 billion.
B)left by $36 billion.
C)right by $34 billion.
D)right by $36 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC) = 1/(1-0.75) = 4. The initial increase in government spending of $10 billion will increase aggregate demand by 10 * 4 = $40 billion. However, considering the crowding-out effect of $6 billion, the net shift in aggregate demand will be $40 billion - $6 billion = $34 billion to the right.

Assume the MPC Is 0