Question

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion

Answer 1

$5 billion

Step-by-step explanation:

Calculation of how much would government spending have to rise

The MPC will be :0.8

First step

Using multiplier =1/1-0.8

=1/0.2

=5

Second step is to calculate the amount of the rise in government spending

=25/5

=$5 billion

Therefore the amount that the government spending would have to rise to shift the aggregate demand curve rightward by $25 billion will be $5 billion