Assume that a hypothetical economy with an MPC of 0.75 is experiencing a severe recession. By how much would government...

Assume that a hypothetical economy with an MPC of 0.75 is experiencing a severe recession.

By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion?

MPC = 0.75, So spending multiplier = [ 1 / (1-MPC) ] 

Multiplier = [ 1 / (1 - 0.75) ] 

Multiplier = 1/0.25

Multiplier = 4 

In order to shift the aggregate demand the government would have to increase the spending by $10 billion ($40/multiplier)

Required government spending = 40 / multiplier

Required government spending = 40 /4 = 10

So, the government would have to increase the spending by $10 billion.