If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?
A) $40 billion
B) $133.33 billion
C) $250 billion
D) $400 billion

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, an initial increase in AD of $100 billion will eventually shift the AD curve by 4 * $100 billion = $400 billion.

If the MPC Is 0