Suppose that technological advancements stimulate $20 billion in additional investment spending.If the MPC = .6,how much will the change in investment increase aggregate demand?
A) $12 billion.
B) $20 billion.
C) $33.3 billion.
D) $50 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.6, the multiplier is 2.5. Therefore, the change in investment of $20 billion will increase aggregate demand by $20 billion * 2.5 = $50 billion.

Suppose That Technological Advancements Stimulate $20 Billion in Additional Investment