If net exports increase by $10 billion and the MPC = 0.6, the resulting increase in the consumption component of AD is:

Question

Quizplus · Accepted Answer

According to the formula for calculating the change in AD, we have: 
ΔAD = ΔC + ΔI + ΔG + ΔNX

As net exports (NX) increase by $10 billion, we can say that:
ΔNX = $10 billion

Using the multiplier formula, we can calculate the change in consumption (ΔC):
ΔAD = ΔC/ (1-MPC)
ΔC = ΔAD x (1-MPC)
Where MPC = 0.6

Substituting the values we get:
$10 billion = ΔC/ (1-0.6)
$10 billion = ΔC/0.4
ΔC = $10 billion x 0.4
ΔC = $4 billion

Therefore, the resulting increase in the consumption component of AD is $4 billion.

If Net Exports Increase by $10 Billion and the MPC