Suppose the MPC is 0.75.There are no crowding out or investment accelerator effects.If the government increases its expenditures by $200 billion,then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion,then by how far does aggregate demand shift to the right?
A) $800 billion and $800 billion
B) $800 billion and $600 billion
C) $600 billion and $600 billion
D) $600 billion and $450 billion

Question

Quizplus · Accepted Answer

If the MPC is 0.75, then the government spending multiplier is 1/(1-MPC) = 4. So if the government increases its expenditures by $200 billion, then aggregate demand will shift to the right by $200 billion x 4 = $800 billion.

Similarly, if the government decreases taxes by $200 billion, then the tax multiplier is also 4, and aggregate demand will shift to the right by $200 billion x 4 = $800 billion.

Therefore, the correct answer is B.

Suppose the MPC Is 0