If the marginal propensity to save is 0.10 and the initial decline in investment is $100,by how much will aggregate demand eventually decrease?
A)$100.
B)$900.
C)$1,000.
D)$10,000.

Question

Quizplus · Accepted Answer

The formula for calculating the total decrease in aggregate demand is:

Total decrease in AD = initial decrease in investment / (1 - marginal propensity to consume)

Since the marginal propensity to save is given in the question, we can calculate the marginal propensity to consume as:

Marginal propensity to consume = 1 - marginal propensity to save
= 1 - 0.10
= 0.90

Substituting the values into the formula, we get:

Total decrease in AD = 100 / (1 - 0.90)
= 100 / 0.10
= $1,000

Therefore, the correct answer is choice C, which is $1,000.

If the Marginal Propensity to Save Is 0