If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift
A) leftward by $40 billion at each price level.
B) rightward by $20 billion at each price level.
C) rightward by $40 billion at each price level.
D) leftward by $20 billion at each price level.

Question

Quizplus · Accepted Answer

The decrease in investment decreases aggregate demand. With an MPC of 0.5, the multiplier is 1/(1-MPC) = 2. Thus, a $20 billion decrease in investment leads to a $40 billion leftward shift in the aggregate demand curve.

If Investment Decreases by $20 Billion and the Economy's MPC