Suppose the MPC in the economy in Figure 10.2 equals 0.5 and the shift from AD₀ to AD₁ was caused by a decrease in consumption of $12 billion.What will the total decrease in aggregate demand be (for example,AD₀ to AD₂)as a result of the initial $12 billion decrease? A)$12 billion because there are no multiplier effects associated with a change in consumption. B)$600 billion. C)$24 billion.

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Quizplus · Accepted Answer

The total decrease in aggregate demand will be $24 billion, calculated as follows: Initial decrease in consumption = $12 billion Multiplier = 1/(1-MPC) = 2 Total decrease in aggregate demand = $12 billion x 2 = $24 billion, resulting in a shift from AD₀ to AD₂. Therefore, option C is the correct answer. Option A is incorrect as it does not take into account the multiplier effect, which magnifies the impact of changes in consumption on overall aggregate demand. Option B is also incorrect as it does not use the correct multiplier value.

Suppose the MPC in the Economy in Figure 10