Suppose the MPC is .60.Assume there are no crowding out or investment accelerator effects.If the government increases expenditures by $200 billion how far does aggregate demand shift? If the government decreases taxes by $200 billion how does aggregate demand shift?
A)$300 billion and $180 billion
B)$300 billion and $300 billion
C)$500 billion and $300 billion
D)$500 billion and $500 billion

Question

Quizplus · Accepted Answer

The government spending multiplier is 1/(1-MPC) = 1/(1-0.60) = 2.5. So, a $200 billion increase in government spending shifts aggregate demand by 2.5 * $200 billion = $500 billion. The tax multiplier is MPC/(1-MPC) = 0.60/0.40 = 1.5. So, a $200 billion tax decrease shifts aggregate demand by 1.5 * $200 billion = $300 billion.

Suppose the MPC Is