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

Question

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 Spendia 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. The expenditures multiplier of this third nation is, suggesting an MPC of .

Explanation / Answer

The investment multiplier is given as M = 1/1-MPC.

a. For Spendia, MPC = 0.8

M = 1/1-0.8 = 1/0.2 = 5

income increases by = gross investment * multiplier

Y = 100*5 = $500.

b. For Savia, MPC = 0.5

M = 1/1-0.5 = 1/0.5 = 2

Y = 100 * 2 = $200.

c. For third nation, Y = 250 and Investment I = 100,

Y = M * I.

250 = M * 100.

M = 2.5 = expenditure multiplier

Also, M = 1/1-MPC

2.5 = 1/1-MPC

2.5*(1-MPC) = 1

2.5 - 2.5*MPC = 1

1.5 = 2.5*MPC

MPC = 1.5/2.5

MPC = 0.6

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---