Suppose a country institutes an investment tax credit and that leads to an increase in investment spending of $100 billion.Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion.This action is

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The increase in investment spending of $100 billion will have a multiplied effect on GDP, which is $100 billion multiplied by the multiplier of 1.5, resulting in a $150 billion increase in GDP. This increase in GDP will lead to an increase in aggregate demand, and since the initial increase in investment spending was caused by a government policy, it is an expansionary policy. However, the shift in the aggregate demand curve will not be equal to the increase in GDP, as other factors can shift the curve in the opposite direction. Thus, the aggregate demand curve will shift to the right by $1,500 billion, which is the result of the multiplied increase in investment spending ($150 billion) divided by the marginal propensity to consume (0.75, which is the inverse of the multiplier) or $150 billion/0.75.

Suppose a Country Institutes an Investment Tax Credit and That