Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, 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 change in aggregate demand can be calculated using the spending multiplier, which is 1/(1-MPC). With an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, the increase in aggregate demand is 2.5 times the initial investment of $20 billion, which equals $50 billion.

Suppose That Technological Advancements Stimulate $20 Billion in Additional Investment