If investment decreases by $20 billion and the MPC is 0.8,what will the resulting decrease in the consumption component of AD be?
A)$16 billion
B)$4 billion
C)$100 billion
D)$80 billion

Question

Quizplus · Accepted Answer

Since the MPC (marginal propensity to consume) is 0.8, for every $1 decrease in investment, consumption will decrease by $0.8. Therefore, a $20 billion decrease in investment will lead to a $16 billion ($20 billion x 0.8) decrease in consumption. The correct answer is D, $80 billion is not a plausible option and $100 billion is too large of a decrease relative to the decrease in investment. Answer B, $4 billion, is also too small.

If Investment Decreases by $20 Billion and the MPC Is