Assume the marginal propensity to consume (MPC) is 0.75 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the:
A) right by $1,000 billion.
B) right by $750 billion.
C) left by $1,000 billion.
D) left by $750 billion.

Question

Quizplus · Accepted Answer

MPC is the portion of additional income that consumers spend on goods and services, which is 0.75 in this case. The tax cut of $250 billion will increase disposable income by the same amount. The increase in consumption will be 0.75 times $250 billion, or $187.5 billion. This increase in consumption will increase demand by $187.5 billion, and a demand multiplier of 4 (1/0.25) shows that the aggregate demand curve will shift right by $750 billion. Therefore, the correct answer is B.

Assume the Marginal Propensity to Consume (MPC) Is 0