Assume the MPC is 0.8.Assuming only the multiplier effect matters,a decrease in government purchases of $100 billion will shift the aggregate demand curve to the
A)left by $180 billion.
B)left by $500 billion.
C)right by $180 billion.
D)right by $400 billion.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC) = 1/(1-0.8) = 5. Therefore, a decrease in government purchases of $100 billion will decrease aggregate demand by 5 * $100 billion = $500 billion.

Assume the MPC Is 0