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:
ΔY = initial change in spending / (1 - marginal propensity to save)
ΔY = $100 / (1 - 0.10)
ΔY = $100 / 0.90
ΔY = $111.11
Therefore, the aggregate demand will eventually decrease by $1,000.

If the Marginal Propensity to Save Is 0