-Suppose the MPC in the economy in Figure 10.2 equals 0.8 and the shift from AD₀ to AD₁ was caused by a decrease in investment of $30 billion.What will the total decrease in aggregate demand be (i.e. ,AD₀ to AD₂) as a result of the initial $30 billion decrease?

Question

-Suppose the MPC in the economy in Figure 10.2 equals 0.8 and the shift from AD<sub>0</sub> to AD<sub>1</sub> was caused by a decrease in investment of $30 billion.What will the total decrease in aggregate demand be (i.e. ,AD<sub>0</sub> to AD<sub>2</sub>) as a result of the initial $30 billion decrease? A) $37.5 billion. B) $130 billion. C) $150 billion. D) $240 billion.

Quizplus · Accepted Answer

The total decrease in aggregate demand will be equal to the initial decrease in investment multiplied by the multiplier. The multiplier equals 1/(1-MPC), which in this case is equal to 1/(1-0.8) = 5. Therefore, the total decrease in aggregate demand will be 5 times the initial decrease in investment, or $30 billion * 5 = $150 billion.

-Suppose the MPC in the Economy in Figure 10