If the marginal propensity to consume is 0.2 and there is a $10 million increase in one component of spending, the aggregate demand curve will shift horizontally to the right by:
A) $8 million.
B) $15 million.
C) $2 million.
D) $12.5 million.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Here, MPC is 0.2, so the multiplier is 1/(1-0.2) = 1/0.8 = 1.25. Therefore, a $10 million increase in spending will shift the aggregate demand curve by 1.25 * $10 million = $12.5 million.

If the Marginal Propensity to Consume Is 0