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Assignment Score: 93
Assignment Score: 93.3% Resources Hint Check Answer Attempt 3 Use the graph to illustrate the effects of a $10 billion increase in government spending. Assume that the economy is initially producing at full employment, and the spending multiplier (mº) is 10. 165 LRAS 160 155 150 145 Price level (P) 140 135 130 125 AD 120 115 0 50 100 150 300 350 400 450 500 200 250 Real GDP Type here to search Et e c. 72% Ca » ENG 12:43 AM 10/29/2020 69 11
iii Assignment Score: 93.3% Resources Hint Check Answer ? Attempt 3 150 145 Price level (P) 140 135 130 125 AD 120 115 0 50 100 150 300 350 400 450 500 200 250 Real GDP How much of each additional dollar of income is devoted to consumption? MPC = $ Type here to search te 72% la » ENG 12:43 AM 10/29/2020 69 11
Expert Solution
Government spending is a component of the aggregate demand.
So, an increase in government spending will lead to an increase in the aggregate demand.
This initial increase in aggregate demand will create a multiplier effect leading to much larger increase in aggregate demand.
The spending multiplier is 10.
Calculate the cumulative increase in aggregate demand -
Cumulative increase in aggregate demand = Initial increase in government spending * Spending multiplier = $10 billion * 10 = $100 billion
Thus, the cumulative increase in the aggregate demand would be $100 billion.
This increase in the aggregate demand will shift the AD curve to the right by $100 billion at each level of output.
Following is the required figure -
Calculate MPC -
Spending multiplier = 1/(1 - MPC)
1 - MPC = 1/Spending multiplier
1 - MPC = 1/10
1 - MPC = 0.10
MPC = 1 - 0.10 = 0.90
Thus,
The MPC is 0.9
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