Initially,the Economy Is in Long-Run Equilibrium

question 83

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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Definitions:

Diminishing Returns

A principle in economics that states as one input variable is incrementally increased, there comes a point when the rate of resultant output begins to decrease.

Variable Inputs

Inputs, such as labor and materials, whose usage changes according to the level of production.

Economies Of Scale

Cost advantages reaped by companies when production becomes efficient, as the scale of operation increases, leading to a reduction in average cost per unit.

Specialization

The focus of a business or individual on a limited scope of products or skills, allowing for increased efficiency and expertise.