If the marginal propensity to consume is 0.5, an increase in consumption by $200 will shift the aggregate demand curve horizontally to the right by
A) $200.
B) $400.
C) $100.
D) $200.5.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the increase in consumer spending when disposable income increases by $1. So if MPC is 0.5, it means that for every additional dollar of disposable income, people will spend 50 cents on consumption. Therefore, an increase in consumption by $200 implies an increase in disposable income of $400 (since MPC is 0.5, $200 is half of the increase in disposable income). This will cause a horizontal rightward shift of the aggregate demand curve by the same amount: $400.

If the Marginal Propensity to Consume Is 0