Assume the economy is closed and there is no government. The aggregate demand componentsare described below:C = 100 + 0.4YI = 200 + 0.2 YWhat is the multiplier?
Question
Assume the economy is closed and there is no government. The aggregate demand componentsare described below:C = 100 + 0.4YI = 200 + 0.2 YWhat is the multiplier?
Solution 1
The multiplier in an economy is calculated using the formula 1/(1-MPC), where MPC is the marginal propensity to consume.
In this case, the MPC is given as 0.4 (from the consumption function C = 100 + 0.4Y).
So, the multiplier would be 1/(1-0.4) = 1/0.6 = 1.67.
Therefore, the multiplier in this closed economy with no government is 1.67.
Solution 2
The multiplier in an economy is calculated using the formula 1/(1-MPC), where MPC is the marginal propensity to consume.
In this case, the marginal propensity to consume is 0.4 (from the consumption function C = 100 + 0.4Y).
So, the multiplier would be 1/(1-0.4) = 1/0.6 = 1.67.
This means that for every one unit increase in autonomous spending, the total income will increase by 1.67 units.
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