Assume that the MPC is 0.8. Assume that the total crowding-out effect is $25 billion. How will an increase in government purchases of $9 billion shift the AD curve?
A)It will shift the AD curve right by $25 billion.
B)It will shift the AD curve left by $25 billion.
C)It will shift the AD curve right by $20 billion.
D)It will shift the AD curve left by $20 billion

Question

Quizplus · Accepted Answer

The formula for the total impact of a change in government purchases is:
ΔY = ΔG × (1/(1-MPC)) 
where ΔY is the change in real GDP and ΔG is the change in government purchases. 
Using the given values, we get:
ΔY = $9 billion × (1/(1-0.8)) = $45 billion 
However, we know that there will be a crowding-out effect of $25 billion. This means that the net increase in aggregate demand is only $20 billion ($45 billion - $25 billion). Therefore, the AD curve will shift right by $20 billion.

Assume That the MPC Is 0