If net exports increase by $10 billion and the MPC to 0.6,what will the resulting increase in the consumption component of AD be?
A)$25 billion
B)$15 billion
C)$6 billion
D)$4 billion

Question

Quizplus · Accepted Answer

If net exports increase by $10 billion, it will shift the AD curve to the right. To calculate the resulting increase in the consumption component of AD, we need to use the multiplier effect: 
ΔY = ΔAD * (1/1-MPC)
Where ΔY is the resulting change in output or GDP, ΔAD is the change in autonomous spending (in this case, net exports), and MPC is the marginal propensity to consume.

So, ΔAD = $10 billion and MPC = 0.6. 
ΔY = $10 billion * (1/1-0.6)
ΔY = $10 billion * (1/0.4)
ΔY = $25 billion

Therefore, the resulting increase in the consumption component of AD will be $15 billion ($25 billion - $10 billion). Thus, the correct answer is B.

If Net Exports Increase by $10 Billion and the MPC