Question

"In an​ economy, government spending​ (G) and taxes​ (T) are

independent of income. The value of MPC is known to be 0.90. If
government spending increases by ​$20 ​billion, the amount by which"

Answer 1

Given an MPC of 0.90, a $20 billion increase in government spending multiplies through the economy by a factor of 10, leading to a $200 billion increase in aggregate demand.

Step-by-step explanation:

The question pertains to the economic concept of fiscal policy's impact on an economy, focusing particularly on the multiplier effect associated with changes in government spending when taxes are fixed. Given that the marginal propensity to consume (MPC) is 0.90, we analyze the effect of a $20 billion increase in government spending. The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.90) or 10.

Therefore, the initial $20 billion in government spending will result in a total increase in aggregate demand of $200 billion (which is $20 billion multiplied by the spending multiplier of 10). This is because each dollar spent by the government can lead to a 90 cent increase in consumer spending, which then circulates through the economy. This illustrates the powerful effect of the spending multiplier in Keynesian economic theory.