Suppose the consumption function is c = $500 billion + 0.9y and the government wants to stimulate the economy. by how much will aggregate demand at current prices shift initially (before multiplier effects) with
Answer:
Spending Multiplier=1/1-0.9=10
a. the GDP will increase= 10x50=$500 billion
Tax multiplier= 0.9/1-0.9=9
b. the GDP will increase= 50 x 9=$450billion
c. nothing will happen.Transfer payment will not affect GDP.
