Question

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand?

A. $12 billion.
B. $20 billion.
C. $33.3 billion.
D. $50 billion.

Answer 1

The change in investment of $20 billion with an MPC of 0.6 leads to a total increase in aggregate demand of $50 billion due to the multiplier effect.

Step-by-step explanation:

The question asks about the impact of a $20 billion increase in investment spending on aggregate demand, given a marginal propensity to consume (MPC) of 0.6. The multiplier effect can be calculated using the formula 1/(1 - MPC), which in this case is 1/(1 - 0.6) = 2.5.

Therefore, the total increase in aggregate demand would be the initial increase in investment multiplied by the multiplier: $20 billion * 2.5 = $50 billion. The correct answer is D. $50 billion.