Congratulations Youve been appointed economic adviser to the

Congratulations. You’ve been appointed economic adviser to the president of Happyland. Your research assistant says the country’s mpe is 0.7 and autonomous investment has just risen by $30.

Instructions: Enter your responses rounded to the nearest the whole dollar amount.

a. What will happen to income?

Income will (Increase or decrease) by $_______.

b. Your research assistant comes in and says he’s sorry but the mpe wasn’t 0.7; it was 0.6. How does your answer change?

The income will (Increase or decrease) by $________.

c. He runs in again and says exports have fallen by $12 and investment has risen by $12. How does your answer change?

Solution

MPE = 0.7

Investment rises by $30.

(a) By increase in investment,income will also increase. Because Y= C+I+G+NX where C is consumption , I=investment, G=government and NX=Net exports.

Change in Y = 1/(1-MPE)(Change in inestment)

Change in Y = [1/(1-0.7)[30]

Change in Y = 1/0.3 [30]

Change in Y = 100

Therefore, Income will increase by $100.

(b) MPE =0.6

Then Change in Y = 1/(1-0.6) [30]

Change in Y = 1/0.4 (30)

Change in Y =$75.

Therefore, Income will increase by $75.

(c) If exports have fallen by $12 and investment has risen by $12. Then answer will not change because increase in investment cancels out the decrease in exports. Fall in exports ,decreases income and rise in investment , increases income.