If the MPC is 0.80 and there are no crowding-out or accelerator effects,then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by
A) $80 billion.
B) $125 billion.
C) $500 billion.
D) $800 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an initial increase in aggregate demand of $100 billion will eventually increase aggregate demand by $100 billion * 5 = $500 billion.

If the MPC Is 0