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? Multiple Choice $33.3 billion $20 billion $12 billion $50 billion

Answer 1

Answer:

$50 billion

Explanation:

The net effect on aggregate demand of the additional investment spending will be derived by multiplying the increased spending by the Multiplier.

$Multiplier = \frac{1}{1-MPC} = \frac{1}{MPS}$

Where MPC is the marginal propensity to consumer, and

MPS, the marginal propensity to save.

Therefore the multiplier = $\frac{1}{1-0.6} =\frac{1}{0.4}$ = 2.5

Accordingly, the increase in aggregate demand as a result of the increase in the investment

= 2.5 * $20 billion

= $50 billion