Exhibit 17-3

-According to Exhibit 17-3,if we assume the MPC is 0.8,then a shift in the AD curve from AD₀ to AD₁ would require an increase in government spending of:

Question

Exhibit 17-3
 
-According to Exhibit 17-3,if we assume the MPC is 0.8,then a shift in the AD curve from AD₀ to AD₁ would require an increase in government spending of:

Quizplus · Accepted Answer

The shift in the AD curve from AD₀ to AD₁ represents an increase in aggregate demand. We know that the MPC is 0.8, which means that for every $1 increase in disposable income, consumption will increase by $0.8. To calculate the increase in government spending required to shift the AD curve, we use the formula:

ΔY = ΔG/ (1 - MPC)

where ΔY is the change in real GDP and ΔG is the change in government spending.

Assuming potential GDP is held constant, ΔY = change in AD. From the graph, we can see that the shift in AD is about $40 billion.

So:

$40B = ΔG / (1-0.8)
ΔG = $40B x (1-0.8)
ΔG = $40B x 0.2
ΔG = $8 billion

Therefore, the increase in government spending required is $8 billion, which is closest to option B, $10 billion.

Exhibit 17-3 -According to Exhibit 17-3,if We Assume the MPC Is 0.8,then