Initially, the economy is in long-run. Aggregate demand then shifts leftward by

Question

Initially, the economy is in long-run. Aggregate demand then shifts leftward by 50 billion. The government wants to increase its spending in order to avoid a recession. If there is no crowding ut, and if the MPC equals 0.8, then by how much go gov. purchases have to increase in order to offset the 50 billion leftward shift? I was given the choices: a. by 50 billion b. by 10 billion c. by 20 billion d. by 25 billion. But I dont know how to solve it.

Explanation / Answer

Use this formula : 1/(1-MPC)=dy/dG...........(1) Given: dy=$50 Billion MPC=0.8 Substitute the values in eqn (1),you get ==>dy/dG=5 ==>dG=$10Billion Therefore Government purchases had to be increased by $10 Billion . So answer is option (b) Please Rate bro

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