Question

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter your answers as positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion?

Answer 1

The by $10 billion would government spending have to rise to shift the aggregate demand curve rightward by $40 billion.

Step-by-step explanation:

a) Spending multiplier = 1/(1 - MPC)

= 1/(1 - 0.8)

= 5

The required shift in spending = change in GDP/spending multiplier

= $40 billion/5

= $8 billion

Therefore, The by $10 billion would government spending have to rise to shift the aggregate demand curve rightward by $40 billion.