Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the
A)left by $200 billion.
B)left by $400 billion.
C)right by $800 billion.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The multiplier effect is 1/(1-MPC) = 1/(1-0.75) = 4. Therefore, the decrease in government purchases of $100 billion would lead to a decrease in aggregate demand by $100 billion x 4 = $400 billion, shifting the AD curve to the left.

Assume the MPC Is 0