Suppose the MPC is 0.9.There are no crowding out or investment accelerator effects.If the government increases its expenditures by $30 billion,then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion,then by how far does aggregate demand shift to the right?
A)$283 billion and $254.7 billion
B)$283 billion and $283 billion
C)$300 billion and $270 billion
D)$300 billion and $300 billion

Question

Quizplus · Accepted Answer

The government spending multiplier is 1/(1-MPC) = 1/0.1 = 10. So, a $30 billion increase in government spending shifts aggregate demand by $30 billion * 10 = $300 billion. The tax multiplier is MPC/(1-MPC) = 0.9/0.1 = 9. So, a $30 billion tax cut shifts aggregate demand by $30 billion * 9 = $270 billion.

Suppose the MPC Is 0