Assume the MPC is 0.625. Assuming only the multiplier effect matters, a decrease in government purchases of $10 billion will shift the aggregate demand curve to the
A)left by about $13.3 billion.
B)left by about $26.7 billion.
C)right by about $36.7 billion.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The multiplier effect is 1/ (1-MPC) = 1/ (1-0.625) = 2.67. Therefore, a decrease in government purchases of $10 billion will lead to a decrease in aggregate demand by 
$10 billion x 2.67 = $26.7 billion. This will shift the aggregate demand curve to the left by $26.7 billion.

Assume the MPC Is 0