Answer to Question #79072 in Economics of Enterprise for Gladys

Question

Marginal propensity to consume (MPC) = 0.25, Investment (I) = 5500, Government
Spending (G) = 1200, Autonomous consumption (α) = 1500,
Net Exports (X-M) = 2,600
Y= C+ I + G + X-M
C= α + βY
Required;-
i) Calculate the equilibrium level of National Income. (3 marks)
ii) Calculate the equilibrium consumption and savings (4 marks)
iii) Compute a simple investment multiplier and interpret it

Answer 1

i) Calculate the equilibrium level of National Income.
Y = 1500+0.25Y+5500+1200+2600
Y = 0.25Y+10800
0.75Y = 10800
Y = 14400
ii) Calculate the equilibrium consumption and savings.
The consumption function is C= 1500 + 0.25Y
C = 1500+0.25x14400 = 5100
The saving function is S = Y – C
S = 14400 – 5100 = 9300
iii) Compute a simple investment multiplier and interpret it.
The multiplier of investments shows, in what proportion the final increase in the national income is greater than the initial increase in autonomous investments.
M = 1 / (1-0.25) = 1.33
The multiplier of investments in the form of a coefficient makes it possible to determine the multiplier effect. The effect of such investments will be: 5500 x 1.33 = 7333