If the MPC is 0.75 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by
A)$80 billion.
B)$125 billion.
C)$400 billion.
D)$500 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, an initial increase in aggregate demand of $100 billion will eventually increase aggregate demand by $100 billion * 4 = $400 billion.

If the MPC Is 0