If the MPC is 0.8 and there are no crowding-out or accelerator effects,then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by
A)$216 billion.
B)$150 billion.
C)$600 billion.
D)$480 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve by 5 * $120 billion = $600 billion.

If the MPC Is 0