QUESTION 11 Recall that expansionary fiscal policy (fiscal stimulus) can be eith

Question

QUESTION 11 Recall that expansionary fiscal policy (fiscal stimulus) can be either an increase in direct government spending or some form of tax cut or tax rebate. Suppose that direct government spending of $201 billion is proposed, and the MPC for the economy is 0.6. Based on the amount of the proposed direct government spending and the MPC value, by how much would Aggregate Demand ultimately increase due to the multiplier? Round your answer up or down to the nearest whole number. Do not include a dollar sign or decimal point in your answer. Your answer will be either a three or four digit value such as 999 or 9999. Do not include all of the zeros in your answer.

Explanation / Answer

Answer

The increase in AD=incerase in spending/(1-MPC)

=201/(1-0.6)

=502.5

The increase in the AD at most is $503 billion

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