Final answer:
An increase in government spending of $100 billion would result in an increase in Aggregate Demand (AD) due to the Marginal Propensity to Consume (MPC) of 0.8.
Step-by-step explanation:
An increase in government spending would lead to an increase in Aggregate Demand (AD). In this case, the increase in government spending is $100 billion, and the Marginal Propensity to Consume (MPC) is 0.8. MPC represents the proportion of additional income that is spent rather than saved. With an MPC of 0.8, it means that for every additional dollar of income, $0.80 is spent.
Using the formula MPC = change in consumption / change in income, we can calculate the change in consumption that will result from the increase in government spending. MPC = 0.8 = change in consumption / $100 billion. Solving for the change in consumption, we find that an additional $80 billion will be consumed.
The increase in government spending of $100 billion will lead to an increase in consumption of $80 billion. Since consumption is a component of Aggregate Demand, an increase in consumption will lead to an increase in Aggregate Demand. Therefore, the impact of a $100 billion increase in government spending on AD would be an increase in Aggregate Demand.