39. If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by
A. increasing government spending by $25 billion.
B. increasing government spending by $80 billion.
C. decreasing taxes by $25 billion.
D. decreasing taxes by $100 billion.

Question

39.    If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by
A. increasing government spending by $25 billion.
B. increasing government spending by $80 billion.
C. decreasing taxes by $25 billion.
D. decreasing taxes by $100 billion.

BlackTom AI · Accepted Answer

The question gives an economy with MPC = 0.8 and asks how the government could shift the aggregate demand (AD) curve to the right by $100 billion.
First, recall the fiscal multiplier concepts: the spending multiplier is 1/(1 − MPC) and equals 1/0.2 = 5. The tax multiplier is −MPC/(1 − MPC) and equals −0.8/0.2 = −4. So a change in either government spending or taxes affects AD by the multiplier times the fiscal change, with spending and tax cuts increasing AD, and tax increases decreasing AD.
Option A: Increase G by $25 billion. The resulting AD change would be 5 × 25 = $125 billion, which over-shoots the target instead of precisely $100 billion. Therefore this option does not produce exactly a $100 billion rightward shift.
Option B: Increase G by $80 billion. The resulting AD change would be 5 × 80 = $400 billion, far larger than the target, so this is not the correct amount to achieve exactly $100 billion shift.
Option C: Decrease taxes by $25 billion. A tax cut of $25 billion changes AD by (−MPC) × (multiplier) × ΔT = (−0.8) × 5 × (−25) = +$100 billion. In words, tax relief of $25B boosts spending and demand by about $100B, matching the target.
Option D: Decrease taxes by $100 billion. Using the same tax-multiplier logic, this would raise AD by 0.8 × 5 × 100 = $400 billion, which is far more than the desired $100 billion shift.
Thus, the only option that yields exactly a $100 billion rightward shift in AD, given the 0.8 MPC, is the tax cut of $25 billion in option C. The other choices either overshoot or, in the case of tax changes, require different magnitudes to hit the target but are not equal to the specified $25B tax cut.

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