Assume that the marginal propensity to consume is 0.8. If the government increases its purchases of goods and services by $200 and exports decline by $50, at most the equilibrium level of income will _____.

Question

contestada

Respuesta :

jepessoa jepessoa · Answer 1 · 2020-02-07T03:56:33+01:00

Answer:

increase by $750

Explanation:

The marginal propensity to consume (MPC) = 0.8, then the marginal propensity to save (MPS) = 1 - 0.8 = 0.2

Then the government spending multiplier = 1 / 0.2 = 5

If the government increases spending by $200, then consumption will increase by $1,000.

Since exports decrease by $50, then consumption will decrease by $250.

The net effect on income = $1,000 - $250 = $750

Answer Link

Tundexi Tundexi · Answer 2 · 2022-01-04T11:15:18+01:00

Based on the given data, the equilibrium level of income will increase by $750.

Given information

Marginal propensity to consume (MPC) = 0.8

Marginal propensity to save (MPS) = 1 - 0.8

Marginal propensity to save (MPS) = 0.2

Government spending multiplier = 1 / 0.2

Government spending multiplier = 5

Since the government increases spending by $200, then consumption will increase by $1,000 ($200 * 5)

Since exports decrease by $50, then consumption will decrease by $250.

Net effect on income = $1,000 - $250

Net effect on income = $750

In conclusion, the equilibrium level of income will increase by $750.