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23 February, 19:29

If investment increases by $10 billion and the economy's MPC is. 8, the aggregate demand curve will shift:A. rightward by$10 billion at each price level.

B. leftward by $40billion at each price level.

C. rightward by$50 billion at each price level.

D. leftward by $50billion at each price level.

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Answers (1)
  1. 23 February, 23:14
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    Option (C) is correct.

    Explanation:

    Given that,

    Change in investment spending = $10 billion

    Marginal propensity to consume, MPC = 0.8

    Therefore, the magnitude of shift in aggregate demand will be determined by multiplying the spending multiplier with the change in investment.

    Spending multiplier:

    = 1 / (1 - MPC)

    = 1 / (1 - 0.8)

    = 5

    Change in aggregate demand:

    = Increase in investment spending * Spending multiplier

    = $10 billion * 5

    = $50 billion

    Therefore, the aggregate demand curve will shift rightward by $50 billion.
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