Assume the model Y C I G C a bYd G Go I is not equal t

Assume the model: Y = C + I + G C = a + bYd G = Go I is not equal to f (Y) i.e., MPI = 0 Tx = Txo Given a consumption function of C = 20 + .75Yd, a $10 billion increase in government spending will increase the level of aggregate income by:

$7.5 billion
$10 billion
$25 billion
$40 billion
$50 billion

Solution

delta Y / delta G = 1 / 1 - MPC

d ( G) = $10 billion increase

Therefore , d (Y) = [1 / (1 - 0.75 )] * 10 = $40 billion increase .