If government purchases are reduced by $1 billion and the economy's MPC is 0.4,then the aggregate demand curve eventually shifts:
A)leftward by $0.4 billion
B)leftward by $1 billion
C)rightward by $1.67 billion
D)rightward by $1 billion
E)leftward by $1.67 billion

Question

Quizplus · Accepted Answer

The reduction in government purchases by $1 billion with a marginal propensity to consume (MPC) of 0.4 leads to a larger decrease in aggregate demand due to the multiplier effect. The multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.4) = 1.67. Therefore, the aggregate demand curve shifts leftward by $1 billion times the multiplier, which is $1.67 billion.

If Government Purchases Are Reduced by $1 Billion and the Economy's