Assume the MPC is 0.625.Assume there is a multiplier effect and that the total crowding-out effect is $12 billion.An increase in government purchases of $30 billion will shift aggregate demand to the
A)left by $60 billion.
B)left by $36 billion.
C)right by $68 billion.
D)right by $36 billion.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC) = 1/(1-0.625) = 2.67. The initial increase in government purchases is $30 billion, so the total increase in aggregate demand without crowding out would be 2.67 * $30 billion = $80 billion. Considering the crowding-out effect of $12 billion, the net shift in aggregate demand is $80 billion - $12 billion = $68 billion to the right.

Assume the MPC Is 0