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

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. Therefore, an $8 billion increase in investment spending will increase aggregate demand by 4 times that amount, or $32 billion.

Assume That the MPC Is 0