Suppose that there are no crowding-out effects and the MPC is .9 . By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?
An MPC of .9 means the multiplier = 1/(1 - .9) = 10 . The increase in aggregate demand equals the multiplier times the change in government expenditures. So to increase aggregate demand by $10 billion, the government would have to increase expenditures by $1 billion.
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