Question

suppose the mpc is 0.9. if the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? assume that i and nx are not affected by change in g. a. $283 billion b. $30 billion c. $300 billion d. $333 billion

Answer 1

The shift in aggregate demand can be calculated using the multiplier effect, which is the concept that an initial change in aggregate demand leads to a larger overall change in real GDP. Therefore, the correct option is C

Step-by-step explanation:

The MPC (Marginal Propensity to Consume) is the proportion of an increase in income that is spent on consumption. In this case, the MPC is 0.9, which means that for every additional dollar of income, 0.9 dollars will be spent.

According to the question, if the government increases its expenditures by $30 billion, the shift in aggregate demand can be calculated using the multiplier effect.

The multiplier effect is the concept that an initial change in aggregate demand leads to a larger overall change in real GDP. The formula to calculate the multiplier effect is 1/(1-MPC).

In this case, the MPC is 0.9, so the multiplier effect is

1/(1-0.9)

= 1/0.1

= 10.

To calculate the shift in aggregate demand, multiply the change in government spending ($30 billion) by the multiplier effect (10):

$30 billion x 10 = $300 billion.

Therefore, the answer is $300 billion, option C.