Assume that the economy's marginal propensity to consume is 0.9 and the price level is constant. If the U.S. government purchases $10 billion of jet aircraft from American companies, aggregate demand will increase by

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Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.9, the multiplier is 10. Therefore, a $10 billion increase in government purchases will increase aggregate demand by $10 billion * 10 = $100 billion.

Assume That the Economy's Marginal Propensity to Consume Is 0