a. Consider two nations, Spendia and Savia. The MPC for Spendia is 0.8, and the

Question

a. Consider two nations, Spendia and Savia. The MPC for Spendia is 0.8, and the MPC for Savia is 0.5. Assume that both nations experience an increase in gross investment (I) of $100 million at their existing GDP levels.

Considering the multiplier effect, what will be the overall increase in income (Y) for each nation?

     The increase in income for Spendia is ______ million, describing an expenditures multiplier of ________.

     The increase in income for Savia is $_______ million, describing an expenditures multiplier oF _________.

b. Now assume that a third nation experiences an increase of $250 million in its income and its gross investment (I) increases by the same amount as Spendia and Savia, which is $100 million.

     Instructions: Round your answers to 2 decimal places.

     The expenditures multiplier of this third nation is ________ suggesting an MPC of _________.

Explanation / Answer

Now ependiture multiplier is equal to 1/(1-MPC), and the increase in income is equal to (Multiplier x Increse in investmwnt)

For spendia ,

MPC = 0.8, incres in investment= $100

Multiplier = 1/(1-0.8) = 5

Increse in income = 5 x 100 = $500

For Savia

MPC = 0.5, increse in investment = $100

Multiplier = 1/(1-0.5) = 2

Increse in income = 2 x 100 = $ 100

For third country,

Increase in income = $250

Increse in investment = $100

Multiplier = 250/ 100 = 2.5

MPC = 1 - 1/multiplier

MPC = 1 - 1/2.5

= 0.6

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.