Question

The following table is given:

Y is income, C is consumption expenditures, I is investment expenditures, G is government expenditures, X is exports and M is imports.

Y	C	I	G	X	M
100	110	50	60	60	15
200	170	50	60	60	30
300	230	50	60	60	45
400	290	50	60	60	60
500	350	50	60	60	75
600	410	50	60	60	90

1. Calculate total expenditures.
2. Find the equilibrium level of income.
3. Calculate Marginal Propensity to Consume and Marginal Propensity to Import.
4. Calculate multiplier.

Answer 1

a.

AE=C+I+G+X-M

b.

Since in equilibrium

Y=AE

Hence equilibrium level of income is $400.

c.

Since the marginal propensity to consume is the additional consumption from additional disposable income.

MPC=change in consumption / change in disposable income

Marginal propensity to consume (MPC)

MPC=change in consumption / change in disposable income

=(170-110)/(200-100)

=60/100

=0.6

Marginal propensity to import (MPI)= change in import / change in disposable income

=(30-15)/(200-100)

=15/100

=0.15

d.

Spending multiplier=1/MPS

MPS=1-MPC

=1-0.6

=0.4

Spending multiplier=1/MPS

=1/0.4

=2.5