Suppose the MPC in the economy in Figure 10.2 equals 0.8 and the shift from AD₀ to AD₁ was caused by a decrease in investment of $30 billion.What will the total decrease in aggregate demand be (i.e. ,AD₀ to AD₂)as a result of the initial $30 billion decrease? A)$37.5 billion. B)$130 billion. C)$150 billion. D)$240 billion.

Question

Quizplus · Accepted Answer

The multiplier effect in this case is 1/(1-MPC) = 1/(1-0.8) = 5. Thus, the initial decrease in investment of $30 billion will result in a total decrease in aggregate demand of 5*$30 billion = $150 billion.

Suppose the MPC in the Economy in Figure 10