Suppose that the MPC is 0.5 and there is no investment accelerator or crowding-out effects.If government expenditures increase by $20 billion,what happens to aggregate demand?

Question

Quizplus · Accepted Answer

According to the simple Keynesian model, an increase in government expenditures will lead to an increase in aggregate demand. The size of the shift in aggregate demand will depend on the size of the MPC. In this case, the MPC is 0.5, which means that for every $1 increase in government spending, aggregate demand will increase by $2. Therefore, an increase in government expenditures by $20 billion will result in a shift in aggregate demand to the right by $40 billion (2 times $20 billion).

Suppose That the MPC Is 0