If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $115 billion increase in government expenditures would shift the aggregate demand curve right by
A)$460 billion, but the effect would be larger if there were an investment accelerator.
B)$460 billion, but the effect would be smaller if there were an investment accelerator.
C)$345 billion, but the effect would be larger if there were an investment accelerator.
D)$345 billion, but the effect would be smaller if there were an investment accelerator.

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, a $115 billion increase in government expenditures would result in a total increase in aggregate demand of 4 * $115 billion = $460 billion. The presence of an investment accelerator would amplify this effect further.

If the Marginal Propensity to Consume Is 0