Assume the MPC is 0.65.Assuming only the multiplier effect matters,a decrease in government purchases of $20 billion will shift the aggregate demand curve to the
A)left by about $30.77 billion.
B)left by about $57.1 billion.
C)right by about $57.1 billion.
D)right by about $30.77 billion.

Question

Quizplus · Accepted Answer

The formula for the multiplier effect is 1/(1-MPC). 
Given that MPC is 0.65, the multiplier effect is 1/(1-0.65) = 2.86. 
Therefore, a decrease in government purchases of $20 billion will decrease aggregate demand by $20 billion x 2.86 = $57.1 billion. 
Since the question asked for the direction of the shift, the answer is left, as the decrease in government purchases decreases aggregate demand.

Assume the MPC Is 0