Assume the marginal propensity to consume (MPC)is 0.80 and the government cuts taxes by $100 billion. The aggregate demand curve will shift to the:

Question

Quizplus · Accepted Answer

The tax cut increases disposable income, leading to increased consumption. With an MPC of 0.80, the initial increase in consumption is $80 billion. The spending multiplier is 1/(1-MPC) = 5, so the total shift in aggregate demand is 5 times the initial increase, or $400 billion to the right.

Assume the Marginal Propensity to Consume (MPC)is 0