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Assume that there is no accelerator affect. The MPC = 3/4. The government increases both expenditures and taxes by $600. The effect of taxes on aggregate demand is 3/4 the size of that created by government expenditures alone. The crowding out effect is 1/5 as strong as the combined effect of government expenditures and taxes on aggregate demand. How much does aggregate demand shift by?

User Xash
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To calculate the shift in aggregate demand, you need to consider the combined effect of government expenditures and taxes, the effect of taxes alone, and the crowding-out effect.

1. **Effect of Government Expenditures Alone:**
The government increases expenditures by $600, and the MPC (Marginal Propensity to Consume) is 3/4. So, the initial change in aggregate demand due to government expenditures is:
Change in AD (Expenditures) = $600 * (1 / (1 - MPC)) = $600 * (1 / (1 - 3/4)) = $600 * (1 / (1/4)) = $600 * 4 = $2400.

2. **Effect of Taxes Alone:**
The effect of taxes on aggregate demand is 3/4 the size of that created by government expenditures alone, so:
Change in AD (Taxes) = (3/4) * $2400 = $1800.

3. **Crowding-Out Effect:**
The crowding-out effect is 1/5 as strong as the combined effect of government expenditures and taxes. So, the crowding-out effect is:
Crowding-Out Effect = (1/5) * ($2400 - $1800) = (1/5) * $600 = $120.

Now, to find the net change in aggregate demand, we sum up these effects:
Net Change in AD = Change in AD (Expenditures) - Change in AD (Taxes) - Crowding-Out Effect
Net Change in AD = $2400 - $1800 - $120 = $480.

Therefore, the aggregate demand shifts by $480 due to the changes in government expenditures, taxes, and the crowding-out effect.
User Clifton
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