Final answer:
With an MPC of 0.75, the multiplier effect is 4. Therefore, to shift aggregate demand rightward by $120 billion, the government would need to increase spending by $30 billion.
Step-by-step explanation:
If the marginal propensity to consume (MPC) in an economy is 0.75, we can calculate how much the government could shift the aggregate demand curve rightward by using the multiplier effect.
The multiplier is calculated as 1/(1 - MPC), which in this case would be 1/(1 - 0.75) = 4. This means that for every dollar the government spends, the aggregate demand will increase by four dollars.
So, to find out by how much the aggregate demand could increase with a certain amount of government spending, multiply the government spending by the multiplier. If we want to calculate the effect of a $30 billion increase in government spending, the calculation would be $30 billion x 4 = $120 billion.
Therefore, an initial government spending of $30 billion would shift the aggregate demand curve rightward by $120 billion.
To determine how much the government can shift the aggregate demand curve rightward, we need to understand the concept of marginal propensity to consume (MPC). MPC is the proportion of additional income that people spend. In this case, the MPC is given as 0.75, meaning that for every additional dollar of income, people spend 0.75 dollars. To calculate the shift in aggregate demand, we use the formula:
Change in aggregate demand = MPC x Change in income
Given that the change in income is not provided, we cannot determine the exact shift in aggregate demand. Therefore, we cannot determine which option (1, 2, 3, or 4) is correct.