Suppose that the MPC is 0.50 and there is no investment accelerator or crowding-out effects. If government expenditures increase by $20 billion, what happens to aggregate demand?
A)It shifts right by $20 billion.
B)It shifts right by $25 billion.
C)It shifts right by $40 billion.
D)It shifts left by $40 billion.

Question

Quizplus · Accepted Answer

Given the MPC = 0.50, we use the formula to calculate the change in aggregate demand:

ΔAD = ΔG × (1/1-MPC) = $20 billion × (1/1-0.50) = $40 billion

Therefore, the aggregate demand curve shifts right by $40 billion.

Suppose That the MPC Is 0