If net exports fall $20 billion and the MPC is 7/10 and there is a multiplier effect,but no crowding out and no investment accelerator,then
A) aggregate demand falls by 10/3 x $20 billion.
B) aggregate demand falls by 7/3 x $20 billion.
C) aggregate demand falls by 7/10 x $20 billion.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.7) = 10/3. Therefore, the change in aggregate demand is the change in net exports multiplied by the multiplier: $20 billion x 10/3.

If Net Exports Fall $20 Billion and the MPC Is