If the marginal propensity to consume is 2/3,and there is no investment accelerator or crowding out,a $20 billion increase in government expenditures would shift the aggregate demand curve right by
A)$30 billion, but the effect would be larger if there were an investment accelerator.
B)$30 billion, but the effect would be smaller if there were an investment accelerator.
C)$60 billion, but the effect would be larger if there were an investment accelerator.
D)$60 billion, but the effect would be smaller if there were an investment accelerator.

Question

Quizplus · Accepted Answer

The formula for calculating the shift in aggregate demand is ΔY = (1/1-mpc)ΔG, where ΔY is the change in output and ΔG is the change in government expenditure.
Using the given information, ΔY = (1/1-2/3) * 20 = 60 billion.
Since there is no investment accelerator or crowding out, the multiplier effect is at its maximum, resulting in a larger shift in the aggregate demand curve.
Hence, the correct answer is C - $60 billion, but the effect would be larger if there were an investment accelerator.

If the Marginal Propensity to Consume Is 2/3,and There Is