Suppose the closed economy is in long-run equilibrium. Pessimism on the part of investors

then shifts the aggregate-demand curve $50 billion to the left. The government wants to

increase spending in order to avoid a recession. If the crowding-out effect is always half as

strong as the multiplier effect, and if the MPC equals 0.9, by how much do government

purchases have to rise?

A : $10 billion

B : $20 billion

C : $50 billion

D : $100 billion

Spending Multiplier = 1/(1 - MPC)

Change in Aggregate Demand = Value of Initial Change * Spending Multiplier