If households spend 0.65 of each additional dollar they earn, the marginal propensity to consume (MPC) is 13/20, or 0.65 in decimal form. The formula for the spending multiplier is:

Each $1.00 increase in spending leads to a $2.86 increase in aggregate demand by way of the multiplier effect. In this case, when the government increases purchases by $350 billion, aggregate demand initially rises by $350 billion. The increase in government purchases increases income by $350 billion, causing a first-round change in consumption equal to 0.65×$350 billion=$227.5 billion$0.65\times \mathrm{\$350}\mathrm{ billion}=\mathrm{\$227.5}\mathrm{ billion}$. This increase in consumption spending increases income yet again, leading to a second-round change in consumption equal to 0.65×$227.5 billion=$147.9 billion$0.65\times \mathrm{\$227.5}\mathrm{ billion}=\mathrm{\$147.9}\mathrm{ billion}$.

The total change in demand is given by the following formula:

By way of the multiplier effect, the increase in government purchases increases total demand at each price level by $350 billion×2.8571=$1 trillion$\mathrm{\$350}\mathrm{ billion}\times 2.8571=\mathrm{\$1}\mathrm{ trillion}$. Therefore, the aggregate demand curve will shift to the right by $1 trillion.