Thank you for visiting Assume that the economy is at equilibrium at 10 trillion with a marginal propensity to consume of 0 75 If exports rise by 0 5. This page is designed to guide you through key points and clear explanations related to the topic at hand. We aim to make your learning experience smooth, insightful, and informative. Dive in and discover the answers you're looking for!
Answer :
Final answer:
With an MPC of 0.75 and a decrease in net exports of $0.2 trillion, the multiplier effect leads to a fall in equilibrium income by $0.8 trillion.
Explanation:
The student's question pertains to the change in equilibrium income in a model economy with a given marginal propensity to consume (MPC). When exports rise by $0.5 trillion and imports increase by $0.7 trillion, we must consider that, in the Keynesian model, total spending consists of consumption, investment, government spending, exports, and imports. Since the economy is initially at equilibrium, any changes in exports and imports will shift the aggregate expenditure and thereby affect equilibrium income. In this case, the net exports decrease by $0.2 trillion (exports minus imports), which would directly reduce aggregate expenditure by $0.2 trillion. However, with an MPC of 0.75, the multiplier effect must be considered.
- The multiplier is calculated as 1/(1 - MPC).
- The multiplier in this economy is 1/(1 - 0.75) = 4.
- Therefore, the change in equilibrium income, considering the multiplier effect, would be -0.2 trillion × 4 = -0.8 trillion.
Thus, the correct answer is c. fall by $0.8 trillion.
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Rewritten by : Jeany
Answer:
Option (c) is correct.
Explanation:
Multiplier effect = 1 ÷ (1 - marginal propensity to consume)
= 1 ÷ (1 - 0.75)
= 4
Net exports = Exports - Imports
= 0.5 - 0.7
= (-0.2)
Impact on the equilibrium income = Net exports × Multiplier effect
= (-0.2) × 4
= (-0.8),
so, the equilibrium income will fall by $0.8 trillion.
