(Advanced analysis) Assume that the MPS is 0.33 in an economy that has an aggregate supply curve with a slope of 1.An increase in investment spending of $10 billion will shift the aggregate demand curve rightward by
A)$30 billion and increase real GDP by $15 billion.
B)$30 billion and increase real GDP by $30 billion.
C)$10 billion and increase real GDP by $30 billion.
D)$10 billion and increase real GDP by $10 billion.

Question

Quizplus · Accepted Answer

The MPS is 0.33, so the MPC is 0.67. An increase in investment spending of $10 billion will shift the aggregate demand curve rightward by $10 billion / 0.67 = $30 billion. The increase in real GDP will be $30 billion * 0.5 = $15 billion.

(Advanced Analysis) Assume That the MPS Is 0