Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to…

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to…

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Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by
$50 billion. The government wants to increase its spending in order to avoid a recession. If
the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC
equals 0.8, then by how many billion dollars does the government have to increase purchases
in order to offset the $50 billion leftward shift? (Your answer should be the billions of dollars
needed to offset the initial shift of the AD. For example, if your answer is $1 billion, you would
write 1)

Expert Answer:

Answer rating: 100% (QA)

In this scenario the initial leftward shift in aggregate demand AD leads to a recessionary gap which the government aims to close by increasing its sp
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