$10 billion gov’t spending increase with MPC 0.9 raises AD by:

This choice incorrectly suggests a minimal increase in AD. The $9 billion value does not account for the multiplicative effect of the MPC on the initial government spending. Instead, it incorrectly assumes that only a fraction of the spending directly increases AD without considering the full multiplier effect.

This option represents the initial increase in government spending itself, not the resultant change in AD. While $10 billion is the direct fiscal injection, it fails to incorporate the additional effect stemming from the consumption induced by the MPC, which amplifies the impact on overall demand.

Here, the increase of $90 billion suggests an error in applying the multiplier effect. Although it recognizes that the AD increase is more than just the initial spending, it underestimates the total effect. The correct calculation shows that the increase should be $100 billion, not $90 billion, as the entire spending cycle is accounted for.