Initially, the Economy Is in Long-Run Equilibrium

question 21

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 one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

• A)By $90 billion
• B)By $60 billion
• C)By $20 billion
• D)By $30 billion

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