Question

Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the a. left by $24 billion. b. right by $34 billion. c. left by $36 billion. d. right by $36 billion.

Answer 1

Based on the information given, the purchases will shift the aggregate demand to D. right by $36 billion.

Based on the information given, it can be deduced that the multiplier value will be:

= 1/(1 - 0.75)

= 1/0.25

= 4

The increase in output will be:

= 4 × 10

= 40 million.

= 40 million - 4 million

= 36 million

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