Question

If the MPC is 0.80 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

Answer 1

Answer:

$500 billion

Explanation:

Given that,

Marginal propensity to consume, MPC = 0.80

There are no crowding-out or accelerator effects.

Initial increase in an aggregate demand = $100 billion

Now, the magnitude of the rightward shift in the aggregate demand curve is determined by calculating the spending multiplier.

Spending multiplier:

= 1 ÷ (1 - MPC)

= 1 ÷ (1 - 0.8)

= 1 ÷ 0.2

= 5

Therefore, the overall change in the aggregate demand is calculated as follows:

= Initial increase in the aggregate demand × Spending multiplier

= $100 billion × 5

= $500 billion

Hence, the aggregate demand curve will eventually shift rightwards by $500 billion.