Narrbegin Exhibit 17.3
-According to Exhibit 17.3, if we assume the MPC is 0.8, then a shift in the AD curve from AD0 to AD1 would require an increase in government spending of:
A) $5 billion.
B) $10 billion.
C) $50 billion.
D) greater than $50 billion to allow for inflation.

Question

Narrbegin Exhibit 17.3  
-According to Exhibit 17.3, if we assume the MPC is 0.8, then a shift in the AD curve from AD0 to AD1 would require an increase in government spending of:
A) $5 billion. 
B) $10 billion. 
C) $50 billion. 
D) greater than $50 billion to allow for inflation.

Quizplus · Accepted Answer

From Exhibit 17.3, we can see that the vertical distance between AD0 and AD1 is equal to the government spending multiplied by the MPC, which is 0.8 in this case. Therefore, the required increase in government spending would be (500 - 400) / 0.8 = $125 billion. However, we are only interested in the change from AD0 to AD1, which means we need to subtract the increase required to maintain the original equilibrium at point A. This is equal to (400 - 375) / 0.8 = $31.25 billion. Therefore, the net increase in government spending required to shift the AD curve from AD0 to AD1 is $125 - $31.25 = $93.75 billion, which is closest to option B.