If the MPC = 0.80,the total change in spending resulting from an initial $500 decrease in aggregate spending will be
A)$300.
B)$800.
C)$2500.
D)$833.

Question

Quizplus · Accepted Answer

The total change in spending resulting from an initial change in aggregate spending can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC (marginal propensity to consume) of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an initial decrease of $500 in spending will result in a total decrease of 5 * $500 = $2500.