Suppose that the MPC is .60 and there is no investment accelerator or crowding- out effects.If government expenditures increase $20 billion,aggregate demand
A)shifts right $80 billion.
B)shifts right $50 billion.
C)shifts right $32 billion.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The formula for the calculation of the total shift in aggregate demand is given by:

ΔAD = ΔC + ΔI + ΔG + ΔNX

where AD denotes aggregate demand, C denotes consumption expenditure, I denotes investment expenditure, G denotes government expenditure, and NX denotes net exports.

As there are no investment accelerator or crowding-out effects, we can assume that ΔI and ΔNX are equal to zero. Therefore, we can simplify the formula as:

ΔAD = ΔC + ΔG

Now, as the MPC is 0.60, it implies that for every $1 increase in government expenditure, consumption expenditure would increase by $0.60. Therefore, the ΔC would be 0.6 times ΔG or 0.6 x $20 billion = $12 billion.

Thus, the total shift in aggregate demand would be:

ΔAD = ΔC + ΔG = $12 billion + $20 billion = $32 billion

Therefore, the correct choice is B, which states that aggregate demand shifts right by $50 billion.

Suppose That the MPC Is