Question

Assume that a hypothetical economy with an MPC of 0.75 is experiencing a severe recession. Instructions: In part a, round your answers to 1 decimal place. Enter your answers as a positive number. In part b, enter your answers as a whole number. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion

Answer 1

$6.25 billion

Step-by-step explanation:

Calculation for how much would government spending have to rise

First step is to calculate the spending multiplier using this formula

Spending multiplier=1/(1-MPC)

Let plug in the formula

Spending multiplier=1/(1-0.75)

Spending multiplier=4

Now let calculate how much would government spending have to rise

Using this formula

Increase in government spending =Change in GDP/Spending multiplier

Let plug in the formula

Increase in government spending=$25 billion/4

Increase in government spending=$6.25 billion

Therefore how much would government spending have to rise will be $6.25 billion