Question

Congratulations. You’ve been appointed economic adviser to the president of Happyland. Your research assistant says the country’s mpe is 0.7 and autonomous investment has just risen by $30.

Instructions: Enter your responses rounded to the nearest the whole dollar amount.

a. What will happen to income?

Income will (Increase or decrease) by $_______.

b. Your research assistant comes in and says he’s sorry but the mpe wasn’t 0.7; it was 0.6. How does your answer change?

The income will (Increase or decrease) by $________.

c. He runs in again and says exports have fallen by $12 and investment has risen by $12. How does your answer change?

	- Income will increase by $52.
-	Income will increase by $42.
-	Income will increase by $40.
	- It doesn't. The increase in investment cancels out the decrease in exports.

Answer 1

MPE = 0.7

Investment rises by $30.

(a) By increase in investment,income will also increase. Because Y= C+I+G+NX where C is consumption , I=investment, G=government and NX=Net exports.

Change in Y = 1/(1-MPE)(Change in inestment)

Change in Y = [1/(1-0.7)[30]

Change in Y = 1/0.3 [30]

Change in Y = 100

Therefore, Income will increase by $100.

(b) MPE =0.6

Then Change in Y = 1/(1-0.6) [30]

Change in Y = 1/0.4 (30)

Change in Y =$75.

Therefore, Income will increase by $75.

(c) If exports have fallen by $12 and investment has risen by $12. Then answer will not change because increase in investment cancels out the decrease in exports. Fall in exports ,decreases income and rise in investment , increases income.