Assume that the MPC is. 80. If the Federal Reserve decreases the money supply, interest rates rise, and investment spending falls by $10 billion, then aggregate demand is most likely to:

A. Increase by $10 billion

B. Decrease by $10 billion

C. Increase by $50 billion

D. Decrease by $50 billion

Question

Esperanza Gregory

Business

20 July, 10:18

Assume that the MPC is. 80. If the Federal Reserve decreases the money supply, interest rates rise, and investment spending falls by $10 billion, then aggregate demand is most likely to:

A. Increase by $10 billion

B. Decrease by $10 billion

C. Increase by $50 billion

D. Decrease by $50 billion

+2

Answers (1)

Know the Answer?

Pierce Shepard · Answer 1

D) Decrease by $50 billion

Explanation:

If the marginal propensity to consume (MPC) = 0.8, that means that the marginal propensity to save (MPS) = 1 - MPC = 1 - 0.8 = 0.2

If investment spending falls by $10 billion, then aggregate demand will decrease by: $10 billion / 0.2 = $50 billion.

Assume that the MPC is. 80. If the Federal Reserve decreases the money supply, interest rates rise, and investment spending falls by $10 billion, then aggregate demand is most likely to:A. Increase by $10 billionB. Decrease by $10 billionC. Increase by $50 billionD. Decrease by $50 billion

Assume that the MPC is. 80. If the Federal Reserve decreases the money supply, interest rates rise, and investment spending falls by $10 billion, then aggregate demand is most likely to:

A. Increase by $10 billion

B. Decrease by $10 billion

C. Increase by $50 billion

D. Decrease by $50 billion