If households save $40 billion less at each level of income and the marginal propensity to consume (MPC)is 0.8,the aggregate expenditure line will _____.
A)intersect the 45-degree line at a real GDP of $40 billion
B)shift upward by $40 billion
C)shift downward by $40 billion
D)shift upward by $200 billion because of the multiplier mechanism
E)shift downward by $200 billion because of the multiplier mechanism

Question

Quizplus · Accepted Answer

Since the households save $40 billion less at each level of income and the MPC is 0.8, it means they consume $160 billion more (0.8 * $40 billion) at each level of income. This increase in consumption will shift the aggregate expenditure line upward by $40 billion (the initial decrease in saving).

If Households Save $40 Billion Less at Each Level of Income