Assuming that the new level of national income is K600m calc

Assuming that the new level of national income is K600m. calculate the new level of national icone when b= 0.8 and ??=K4001, 22.

Solution

MPC = b = 0.8

Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1 / 0.2 = 5

Therefore, as I increases by K1, national income increases by K5.

As I increases by K400m, national income increases by K(400 m x 5) = K2000.

New level of national income = K(600 + 2000)m = K2600m.