The government increases both its expenditures and taxes by $400 billion.There is no crowding out and no accelerator effect.Aggregate demand shifts by $400 billion.Which of the following is consistent with how far aggregate demand shifts?
A)MPC = 1/2,and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.
B)MPC = 2/3,and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures
C)MPC = 3/4,and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The multiplier effect is 1/(1-MPC). If MPC = 1/2, the multiplier is 2, and the increase in aggregate demand is $800 billion. If MPC = 2/3, the multiplier is 3, and the increase in aggregate demand is $1200 billion. If MPC = 3/4, the multiplier is 4, and the increase in aggregate demand is $1600 billion.

The Government Increases Both Its Expenditures and Taxes by $400