If the marginal propensity to consume is 0.5, a decrease in consumption by $100 will shift the aggregate demand curve horizontally to the left by
A) $400.
B) $100.5.
C) $200.
D) $100.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is the fraction of additional income that is used for consumption. If the MPC is 0.5, then a decrease in consumption of $100 means that income has decreased by $200 (since 0.5 * $200 = $100). This decrease in income will shift the aggregate demand curve horizontally to the left by the same amount, which is $200. Therefore, the correct answer is C.

If the Marginal Propensity to Consume Is 0