My textbook had the following question: The net exports of a particular area dur
ID: 1251181 • Letter: M
Question
My textbook had the following question:The net exports of a particular area during a given time period amounted to $40 million.
The people living in that area have a marginal propensity to consume from their income as follows:
* for residential expenses (i.e. to pay for rent), of 0.15
* for other goods, of 0.65
The consumers in that area keep a 3-to-7 relationship between the amount they spend on residential expenses and the amount they spend on other goods.
Assume that the price of residential expenses, as well as the price of other goods, do not change over time.
Answer these 2 questions:
* What is the total income of the people in that area?
* For every increase of $1 million in exports by the people in that area, how much will their total income rise?
The answer to the first question is $80 million
The answer to the second question is $2 million
I don't understand how they arrived at these answers. Please explain. Thank you.
Explanation / Answer
Well, if you take the weighted average of their marginal propensities to consume (weighted on the basis of the 3 to 7 relationship) we have .15*.3+.65*.7= 0.5 overall. Thus a person will consume 0.5 of their income and save (represented here by exports) 0.5 of it. So with 40 million of exports we have 40/.5=80 million of total income. With every additional 1 million of exports we have 1/.5= 2 million of income.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.