Aggregate demand will shift when

Question

BlackTom AI · Accepted Answer

Aggregate demand (AD) equals the total planned spending in an economy: AD = C + I + G + NX. Key concepts: the consumption function C = C0 + MPC × (Y − T) (where MPC is the marginal propensity to consume), and the Keynesian multiplier k = 1/(1 − MPC). A change in MPC alters how much of any additional income households spend, which changes C for any given income and thereby shifts the entire AD schedule.

Step-by-step reasoning:
1. Start from the consumption function: C = C0 + MPC·(Y − T). If MPC rises, for any level of disposable income (Y − T) households spend more; if MPC falls, they spend less.
2. The multiplier k = 1/(1 − MPC) determines how an autonomous change in spending (ΔA) translates into an equilibrium change in output: ΔY = k·ΔA. If MPC increases, (1 − MPC) falls, so k rises.
3. Numerical example: if MPC = 0.8, k = 1/(1 − 0.8) = 5. If MPC increases to 0.9, k = 10. An autonomous spending increase of $100 raises equilibrium output by $500 with MPC = 0.8 but by $1,000 with MPC = 0.9. That larger response means the AD curve is at a higher level for each price level — a rightward shift.
4. Therefore, a change in consumers’ MPC changes equilibrium consumption and the multiplier, shifting the AD curve.

Why this is correct: changing MPC changes autonomous-marginal consumption behavior, so aggregate planned spending at every price level differs — by definition an AD shift. Other common distractors:
- A change in the price level causes movement along AD, not a shift.
- Technology or input costs affect aggregate supply (AS), not AD.
- Fiscal policy, money supply, expectations, or foreign demand can also shift AD, but those are separate causes; they do not invalidate the MPC effect.

Conclusion: the correct answer is consumers' change their MPC. This matches the provided answer.

Aggregate demand will shift whenSingle choice

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