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Assume that a hypothetical economy with an MPC of 0

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Assume that a hypothetical economy with an MPC of 0.75 is experiencing a severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion?

Answer Submitted by Anandh on Fri, 2013-04-26 21:39teacher rated 59 times 4.322035price: $0.00 ECONOMICS

MPC = 0.75, So spending multiplier = [ 1 / (1-MPC) ] 

Multiplier = [ 1 / (1 - 0.75) ] 

Multiplier = 1/0.25

Multiplier = 4 

In order to shift the aggregate demand the government would have to increase the spending by $10 billion ( $40/multiplier)