Assume the MPC is 0.75.To eliminate an AD shortfall of $200 billion,the government should

Question

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To eliminate an AD shortfall, the government should increase spending. Using the MPC formula (MPC = ΔC/ΔY), we can see that the change in consumption (ΔC) would be 0.75 times the change in income (ΔY). Thus, to generate an increase in income of $200 billion, the government should increase spending by $50 billion (0.25 * $50 billion = $12.5 billion in leakages). Option A is incorrect because decreasing spending will exacerbate the shortfall. Option C is incorrect because it would generate a contraction in consumption and exacerbate the shortfall. Option D is incorrect because increasing spending by such a large amount would likely generate inflationary pressures.

Assume the MPC Is 0