Assume that the MPC is 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $200 billion shift the aggregate demand curve?
A) It will shift the aggregate demand curve left by $80 billion.
B) It will shift the aggregate demand curve left by $250 billion.
C) It will shift the aggregate demand curve right by $750 billion.
D) It will shift the aggregate demand curve right by $800 billion.

Question

Quizplus · Accepted Answer

The multiplier effect indicates that an initial increase in government purchases will lead to a larger overall increase in aggregate demand. The formula for the multiplier is 1/(1-MPC), which in this case equals 4. With a $200 billion increase in government purchases, the total increase in aggregate demand will be $800 billion ($200 billion x 4). Therefore, the aggregate demand curve will shift to the right by $800 billion.

Assume That the MPC Is 0