Assume that there is a $20 billion increase in government purchases. If MPC = 0.8, the sum of the indirect effect on aggregate demand through induced additional consumption purchases is equal to:

Question

Quizplus · Accepted Answer

The indirect effect on aggregate demand through induced additional consumption purchases can be calculated using the formula for the multiplier effect: Multiplier = 1 / (1 - MPC). With an MPC of 0.8, the multiplier is 1 / (1 - 0.8) = 5. Therefore, the $20 billion increase in government purchases would lead to a total increase in aggregate demand of 20 billion * 5 = $100 billion. However, since the question specifically asks for the sum of the indirect effect, we subtract the initial $20 billion to get $80 billion.

Assume That There Is a $20 Billion Increase in Government