2 Suppos e an economy has the following features Fixed price

2. Suppos e an economy has the following features: Fixed price level .No foreign trade . Autonomous desired investment (1)-$20 billion+\' Government purchases (G) $30 billion Autonomous consumption (C)15 billion The marginal propensity to consume from disposable income 0.75 . Net tax rate0.20 a) (10 marks) Write an equation for AE function b) (5 marks) What is the marginal propensity to spend out of national income? c) (5 marks) Calculate the simple multiplier*

Solution

1) AE = C + I + G + X M

AE = $ 15 billion + $20 billion + $30 billion

AE = $ 65 billion

2) Marginal propensity to spend out of national income = MPC ( 1 - t) - m

Marginal propensity to spend out of national income = 0.75 ( 1 - 0.20)

Marginal propensity to spend out of national income Z= 0.60

3) Simple multiplier = 1 / ( 1 - z)

Simple multiplier = 1 / ( 1 - 0.60)

Simple multiplier = 2.5