If the consumption function is C = 200 + 0.8Y and there is a $10 million increase in investment spending, then the aggregate demand curve will shift horizontally to the right by:
A) $8 million.
B) $12.5 million.
C) $2 million.
D) $50 million.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume (0.8 in this case). The multiplier is 5, so a $10 million increase in investment leads to a $50 million increase in aggregate demand.

If the Consumption Function Is C = 200 + 0