Starting at $30 billion less than full employment,if MPC is 2/3,what impact would an increase in government purchases of $10 billion have on AD?
A)It would decrease AD by $15 billion.
B)It would decrease AD by $30 billion.
C)It would increase AD by $15 billion.
D)It would increase AD by $30 billion.

Question

Quizplus · Accepted Answer

With MPC being 2/3, the government purchases multiplier will be 3/2. Therefore, an increase in government purchases of $10 billion would increase AD by (3/2) x $10 billion = $15 billion.

Starting at $30 billion less than full employment, the increase in AD by $15 billion would bring aggregate demand closer to the level of full employment. Thus, the overall impact on the economy would be an increase in output and employment.

Starting at $30 Billion Less Than Full Employment,if MPC Is