To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.80,the government should increase transfer payments by

Question

Quizplus · Accepted Answer

The formula to calculate the required increase in Transfer Payments is:
Increase in Transfer Payments = AD Shortfall / MPC
Using the given values in the question, we get:
Increase in Transfer Payments = $100 billion / 0.80
Increase in Transfer Payments = $125 billion 
However, the question asks for the amount of increase required, not the total amount of transfer payments. Since transfer payments are currently at $25 billion, the required increase would be:
Increase in Transfer Payments = $125 billion - $25 billion
Increase in Transfer Payments = $100 billion
Therefore, the correct answer is choice A, an increase in transfer payments of $100 billion.

To Eliminate an AD Shortfall of $100 Billion When the Economy