-Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy and the marginal propensity to consume is 0.80.Complete Table 10.1 by calculating the spending cycles as the increased investment spending works its way through the economy. In Table 10.1,what will be the total increase in aggregate demand resulting from the initial $325 increase in investment expenditure after an infinite number of cycles?
A)$1,040.
B)$1,625.
C)$3,965.
D)$325.

Question

-Suppose lower interest rates suddenly lead to an injection of $325 additional investment spending into the economy and the marginal propensity to consume is 0.80.Complete Table 10.1 by calculating the spending cycles as the increased investment spending works its way through the economy. In Table 10.1,what will be the total increase in aggregate demand resulting from the initial $325 increase in investment expenditure after an infinite number of cycles?
A)$1,040. 
B)$1,625. 
C)$3,965. 
D)$325.

Quizplus · Accepted Answer

The total increase in aggregate demand can be calculated using the spending multiplier formula: 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, the total increase in aggregate demand is 5 times the initial investment of $325, which equals $1,625.

-Suppose Lower Interest Rates Suddenly Lead to an Injection of $325