Assume that the MPC is 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $400 billion shift the aggregate demand curve?
A)It will shift the aggregate demand curve left by $150 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 $1600 billion.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.75) = 4. Therefore, an increase in government purchases of $400 billion will shift the aggregate demand curve right by 4 * $400 billion = $1600 billion.

Assume That the MPC Is 0