Question

If the MPC is 0.75 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 a. $125 billion. b. $80 billion. c. $400 billion. d. $500 billion.

Answer 1

Answer:

c. $400 billion

Explanation:

Calculation to determine what an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right

First step is to calculate the GDP Multiplier

Using this formula

GDP Multiplier=1/(1-MPC)

Let plug in the formula

GDP Multiplier=1/1-0.75

GDP Multiplier=1/0.25

GDP Multiplier=4

Now let determine the shift in aggregate demand curve

Shift in aggregate demand curve=4*100 billion

Shift in aggregate demand curve= $400 billion

Therefore an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by $400 billion