Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $150 billion shift the aggregate demand curve?
A) It will shift the aggregate demand curve left by $120 billion.
B) It will shift the aggregate demand curve left by $150 billion.
C) It will shift the aggregate demand curve right by $150 billion.
D) It will shift the aggregate demand curve left by $750 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.8) = 5. A decrease in government purchases of $150 billion will be multiplied by 5, resulting in a shift of the aggregate demand curve to the left by $750 billion.

Assume That the MPC Is 0