Question

If in an economy given mpc = 0.8 and tax rate = 0.2 an increase in autonomous investment of 360 will lead to an increase in output of ?

Answer 1

This can solved using the multiplier

Our ΔI= 360

MPC= 0.8 Meaning that MPS= 1-0.8= 0.2

Therefore the increase in national income will be:-

360/0.2

Therefore, ΔY will be equal to 1800

Increase in total output will be ΔI +ΔY= 1800+ 360= 2160