If investment increases by $10 billion and the economy's MPC is. 8, the aggregate demand curve will shift:A. rightward by$10 billion at each price level.

B. leftward by $40billion at each price level.

C. rightward by$50 billion at each price level.

D. leftward by $50billion at each price level.

Question

Howard Chang

Business

10 July, 08:34

If investment increases by $10 billion and the economy's MPC is. 8, the aggregate demand curve will shift:A. rightward by$10 billion at each price level.

B. leftward by $40billion at each price level.

C. rightward by$50 billion at each price level.

D. leftward by $50billion at each price level.

+4

Answers (1)

Know the Answer?

Billy Mueller · Answer 1

Option (C) is correct.

Explanation:

Given that,

Change in investment spending = $10 billion

Marginal propensity to consume, MPC = 0.8

Therefore, the magnitude of shift in aggregate demand will be determined by multiplying the spending multiplier with the change in investment.

Spending multiplier:

= 1 / (1 - MPC)

= 1 / (1 - 0.8)

= 5

Change in aggregate demand:

= Increase in investment spending * Spending multiplier

= $10 billion * 5

= $50 billion

Therefore, the aggregate demand curve will shift rightward by $50 billion.

If investment increases by $10 billion and the economy's MPC is. 8, the aggregate demand curve will shift:A. rightward by$10 billion at each price level.B. leftward by $40billion at each price level.C. rightward by$50 billion at each price level.D. leftward by $50billion at each price level.

If investment increases by $10 billion and the economy's MPC is. 8, the aggregate demand curve will shift:A. rightward by$10 billion at each price level.

B. leftward by $40billion at each price level.

C. rightward by$50 billion at each price level.

D. leftward by $50billion at each price level.