If the marginal propensity to consume is 5/6, 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)$60 billion, but the effect would be larger if there were an investment accelerator.
B)$60 billion, but the effect would be smaller if there were an investment accelerator.
C)$120 billion, but the effect would be larger if there were an investment accelerator.
D)$120 billion, but the effect would be smaller if there were an investment accelerator.

Question

Quizplus · Accepted Answer

The multiplier effect for government expenditures is equal to 1/(1-MPC) which in this case is equal to 1/(1-5/6) = 6. Since the increase in government expenditures is $20 billion, the total increase in aggregate demand would be 6 times the initial change, so the answer is $20 billion x 6 = $120 billion. Investment accelerator and crowding out do not affect the multiplier effect for government expenditures.

If the Marginal Propensity to Consume Is 5/6, and There