Assume that the MPC is 0.75 and that the price level is "sticky." If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to
A) increase by $6 billion.
B) increase by $8 billion.
C) increase by $32 billion.
D) decrease by $8 billion.

Question

Quizplus · Accepted Answer

Given an MPC (marginal propensity to consume) of 0.75, the multiplier effect is calculated as 1/(1-MPC) = 1/(1-0.75) = 4. Therefore, an $8 billion increase in investment spending will increase aggregate demand by 4 times $8 billion, which equals $32 billion.

Assume That the MPC Is 0