If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then
A)aggregate demand falls by 2 × $40 billion.
B)aggregate demand falls by 11/2 × $40 billion.
C)aggregate demand falls by 11/9 × $40 billion.
D)aggregate demand falls by 9/11 × $40 billion.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-9/11) = 11/2. Therefore, the fall in aggregate demand is 11/2 times the initial decrease in net exports, which is 11/2 × $40 billion.

If Net Exports Fall $40 Billion, the MPC Is 9/11