Initially, the Economy Is in Long-Run Equilibrium

question 31

Multiple Choice

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 half as strong as the multiplier effect, and if the MPC equals 0.8, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

• A)by $5 billion
• B)by $10 billion
• C)by $20 billion
• D)by $50 billion

---

Definitions:

Manufacturing Overhead Costs

Manufacturing overhead costs include all the indirect costs associated with producing goods, such as utilities, rent for production facilities, and maintenance expenses.

Machine Hours

A measurement of production time, tracking the amount of time machines are operated in the manufacturing process.

Direct Labor Hours

Time spent by workers directly involved in the production of goods or services.

Departmental Overhead Rates

Different rates used to allocate overhead costs to products or job functions, based on department-specific activities.