Assume the marginal propensity to consume (MPC) is 0.8 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the:
A) right by $1000 billion.
B) right by $750 billion.
C) left by $1000 billion.
D) left by $750 billion.

Question

Quizplus · Accepted Answer

The aggregate demand curve will shift to the right by $1000 billion because with an MPC of 0.8, the multiplier is 1/(1-MPC) = 1/(1-0.8) = 5. Therefore, a tax cut of $250 billion will increase aggregate demand by 5 * $250 billion = $1000 billion.

Assume the Marginal Propensity to Consume (MPC) Is 0