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9 September, 17:22

Suppose that investment demand increases by $300 billion in a closed and private economy (no government or foreign trade). Assume further that households have a marginal propensity to consume of 80 percent. Ultimately, how much will aggregate demand increase? Enter your answer in billions. For example if your answer is $600 billion then enter 600. If your answer is $1,500 then enter 1500.

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  1. 9 September, 20:20
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    Aggregate demand increase by $1500 billion.

    Answer is 1500

    Explanation:

    Investment demand increases by $300 billion.

    MPC = 0.80

    Multiplier = 1 / (1-MPC)

    Multiplier = 1 / (1-0.8)

    Multiplier = 1 / 0.2

    Multiplier = 5

    Multiplier = Change in GDP / Change in investment

    5 = Change in GDP / $300 billion

    Change in GDP = 5 * $300 billion

    Change in GDP = $1500 billion.
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