Suppose that investment decreases by $15 billion.If the multiplier is 2.5, the aggregate demand curve
A)shifts upward by a vertical distance of $37.5 billion.
B)shifts leftward by a horizontal distance of $37.5 billion.
C)shifts leftward by a horizontal distance greater than $37.5 billion.
D)shifts leftward by a horizontal distance less than $37.5 billion.
E)is not affected.

Question

Quizplus · Accepted Answer

The multiplier effect indicates that a change in investment will lead to a larger change in aggregate demand. With a multiplier of 2.5, a $15 billion decrease in investment results in a $37.5 billion decrease in aggregate demand ($15 billion * 2.5), shifting the aggregate demand curve leftward by a horizontal distance of $37.5 billion.

Suppose That Investment Decreases by $15 Billion