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? Question 5 options: A) $12 billion B) $33.3 billion C) $20 billion D) $50 billion

Answer 1

Answer:

option (D) $50 billion.

Explanation:

Data provided in the question:

Additional investment spending = $20 billion

MPC = 0.6

Now,

Increase in aggregate demand = [1 ÷ (1 - mpc) ] × Investment

or

Increase in aggregate demand =  [1 ÷ (1 - 0.4) ] ×  $20 billion

or

Increase in aggregate demand = (1 ÷ 0.4) × $20 billion

or

Increase in aggregate demand = 2.5 × $20 billion

or

Increase in aggregate demand = $50 billion

Hence.

the correct answer is option (D) $50 billion.