I believe I have the answers to a) .25 and b) 2450 but I am stuck on c. Thanks C

Question

I believe I have the answers to a) .25 and b) 2450 but I am stuck on c. Thanks

Consider the following economy

Ca = 1400 – 12 r      c= 0.75 Ta = 1800    t = 0    ; IP = 2500 – 25 r ; G = 2000 ;                                                      X = 1200   ; NX = -1250 . Assume nx = 0.

a) Compute the marginal propensity to save

b) Calculate the amount of imports for this country

c) Compute the multiplier

e) Derive the equation of the autonomous spending and compute its value for r = 3.5

f) Derive the IS curve and compute its value for r = 3.5

Explanation / Answer

You are right with a and b.

Now on c) Multiplier = 1 / MPS or 1/(1-MPC)

= 1/0.25 (caluculated in part a) = 4

As a result of the multiplier effect, small changes in investment or government spending can create much larger changes in total output. A positive aspect of the multiplier effect is that macroeconomic policy can effect substantial improvements with relatively small amounts of autonomous expenditures. A negative aspect is that a small decline in business investment can trigger a larger decline in business activity and, thereby, create instability.

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