Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The aggregate demand will increase by $2.5 billion, leading to higher tax revenues due to increased economic activity.
B
The aggregate demand will only increase by $500 million, with no significant impact on tax revenues.
C
The aggregate demand will decrease, as increased spending leads to higher savings.
D
The multiplier effect is negligible, so the aggregate demand will remain unchanged.
Understanding the Answer
Let's break down why this is correct
Answer
To understand the impact of the government's decision to spend $500 million on infrastructure, we first need to calculate the spending multiplier. The spending multiplier is determined by the formula 1 divided by the marginal propensity to save (MPS). In this case, since the MPS is 0. 2, the multiplier is 1 / 0. 2, which equals 5.
Detailed Explanation
When the government spends $500 million, it creates jobs and income. Other options are incorrect because This answer misunderstands the multiplier effect; This option suggests that spending leads to saving, which is not the main idea here.
Key Concepts
Spending Multiplier
Aggregate Demand
Marginal Propensity to Save
Topic
Spending and Tax Multipliers
Difficulty
hard level question
Cognitive Level
understand
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