Question

An increase in government purchases shifts the aggregate demand curve to the right by an amount equal to

Answer 1

The shift will be equal to the increase in the amount multiplied by the spending multiplier. This multiplier is found by dividing (1 / marginal propensity to consume). The MPC is the value that shows how much of the new money injected into the economy will be spent by consumers and, thus, is the basis for the multiplier.