Question

Suppose that in the figure to the right, the government

determined that the amount by which the AD curve had to
be shifted directly rightward from point E, was equal to
$1.28 trillion. If the government decided that a $0.33 trillion
increase in real government spending was required to
generate this shift, what must be the value of the MPC?
The value of the MPC associated with this shift is
(Enter your response rounded to two decimal places.)
Price Level
120
110
LRAS
STA
17.5
18
Real GDP per Year ($ trillions)
SRAS
AD2
AD₁

Answer 1

The value of the marginal propensity to consume (MPC) necessary to achieve the rightward shift in the AD curve by $1.28 trillion due to a $0.33 trillion increase in government spending is 0.74.

Step-by-step explanation:

The value of the marginal propensity to consume (MPC) can be determined using the multiplier effect of government spending on the aggregate demand (AD) curve in macroeconomics. Given that the government needs to shift the AD curve rightward by $1.28 trillion as a result of an increase in government spending by $0.33 trillion, the MPC can be calculated using the government spending multiplier formula: Multiplier = 1 / (1 - MPC). Given the multiplier effect required ($1.28 trillion / $0.33 trillion = 3.88), the formula can be rearranged to solve for MPC.

MPC = 1 - (1 / Multiplier)
MPC = 1 - (1 / 3.88)
MPC = 1 - 0.2577
MPC = 0.7423

Therefore, the value of the MPC associated with this shift is 0.74 (rounded to two decimal places).