Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $15 billion shift the aggregate demand curve?
A)It will shift the aggregate demand curve left by $12 billion.
B)It will shift the aggregate demand curve left by $15 billion.
C)It will shift the aggregate demand curve right by $15 billion.
D)It will shift the aggregate demand curve left by $75 billion.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.8) = 5. A decrease in government purchases of $15 billion will shift the aggregate demand curve left by $15 billion * 5 = $75 billion.

Assume That the MPC Is 0