Answer to Question #123481 in Macroeconomics for C. Pratibhu

Question

For an economy without government and foreign trade with MPS=0.20 Describe the multiplier process if autonomous investment increases by 10 units.

Answer 1

We compute the multiplier as:

$$m = \dfrac{\Delta Y}{\Delta I} = \dfrac{1}{MPS}$$

If MPS = 0.20, then:

$$\dfrac{\Delta Y}{\Delta I} = \dfrac{1}{0.2} = 5$$

A multiplier of 5 means that the equilibrium income would increase by 5 units when the autonomous investment increases by 1 unit.