Question

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

Answer 1

The answer is C

Step-by-step explanation:

Multiplier effect = 1 ÷ (1-MPC)

MPC(Marginal Propensity to Consume) = 0.5

1 - 0.5 = 0.5

So we have;

1 ÷ 0.5

2

And the investment decreases by $20 billion.

Therefore we have:

2 x $20 billion = $40billion.

Because it is a decrease, the aggregate demand curve will shift to the left at each price level.

If it is an increase, the aggregate demand curve will shift to the right