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Goryan [66]
3 years ago
11

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shif

t the aggregate demand curve to the:__________
a. left by $180 billion.
b. left by $500 billion.
c. right by $180 billion.
d. right by $400 billion.
Business
1 answer:
Eva8 [605]3 years ago
5 0

Answer:

b. left by $500 billion.

Explanation:

Given marginal propensity to consume, MPC = 0.8

Marginal propensity to consume + Marginal  propensity to save = 1

MPC + MPS = 1

0.8 + MPS = 1

MPS = 1-0.8

MPS = 0.2

Now, the government multiplier = 1/MPS

The government multiplier = 1 / 0.2 = 5

Total fall in aggregate demand = Government multiplier × Government purchases

= 5 ×100

= $500

Since there is a fall in spending so the aggregate demand curve will shift leftwards.

Therefore, the correct option is b. left by $500 billion.

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