Final answer:
The government spending increase of $30 billion will shift aggregate demand to the right by $300 billion due to the multiplier effect.
Step-by-step explanation:
The multiplier effect is a concept in Keynesian economics that explains how an initial increase in government spending can have a larger impact on the economy. In this scenario, the marginal propensity to consume (MPC) is given as 0.9, which means that 90% of any increase in income is spent. To calculate the shift in aggregate demand, we can use the formula:
Change in Aggregate Demand = Change in Government Spending * Multiplier
Here, the change in government spending is $30 billion. The multiplier can be calculated using the formula:
Multiplier = 1 / (1 - MPC)
Plugging in the given MPC value of 0.9:
Multiplier = 1 / (1 - 0.9) = 1 / 0.1 = 10
Therefore, the change in aggregate demand is:
Change in Aggregate Demand = $30 billion * 10 = $300 billion