QUESTION 17 If a $60 billion decrease in government spending shifts AD to the le

Question

QUESTION 17

If a $60 billion decrease in government spending shifts AD to the left by $300 billion, marginal propensity to save is

A.

s = 0.8

B.

s = 0.1

C.

s = 1.2

D.

s = 0.2

10 points   

QUESTION 18

Suppose a decrease in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

A.

aggregate supply right

B.

aggregate supply left

C.

aggregate demand right

D.

aggregate demand left

A.

s = 0.8

B.

s = 0.1

C.

s = 1.2

D.

s = 0.2

Explanation / Answer

Q17

Answer

the spending multiplier=decrease in AD/decrease in government spending=300/60=5

the money multiplier=1/(1-MPC)

5=1/(1-MPC)

5-5MPC=1

5MPC=4

MPC=4/5=0.8

MPS=1-MPC=1-0.8=0.2

option D

Q18

Answer

c aggregate demand right.The government policies are used to stimulate AD and that will shift it right

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