Question

if government expenditure on goods and services increase by​ $100 billion, then aggregate demand​ _____ if the multiplier exists according to the keynesian model

Answer 1

Answer: increases

Step-by-step explanation:

If there is a multiplier, then government expenditure increasing in an economy will lead to aggregate demand increasing as well. This increase will be the product of the increase in government expenditure and the multiplier.

The multiplier is calculated by dividing the formula:

= 1 / (1 - Marginal propensity to consume)

If the MPC is 0.8 in the scenario above for instance, the multiplier would be:

= 1 / ( 1 - 0.8)

= 5

The increase in aggregate demand would be:

= 5 * 100

= $500 billion