If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion 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 aggregate demand by $40 billion, government spending should increase by $4 billion, as $4 billion * 10 = $40 billion.

If the MPS in an Economy Is 0