Assume the marginal propensity to consume (MPC) is 0.80 and the government increases taxes by $100 billion. The aggregate demand curve will shift to the:
A) left by $80 billion.
B) right by $200 billion.
C) right by $400 billion.
D) left by $400 billion.

Question

Quizplus · Accepted Answer

The increase in taxes will decrease disposable income by $100 billion, which will further decrease consumption spending by MPC×$100 billion = 0.80×$100 billion = $80 billion. Therefore, the aggregate demand curve will shift to the left by $80 billion.

Assume the Marginal Propensity to Consume (MPC) Is 0