Question

The information below relates to a closed economy without a government. Use the information to
answer the questions that follow:
 Autonomous consumption = R285 million;
 Autonomous investment = R300 million;
 Marginal propensity to consume = 0.4.
Q.4.1 Calculate the level of autonomous spending. (3)
Q.4.2 Calculate the size of the multiplier. (3)
Q.4.3 Calculate the equilibrium level of income

Answer 1

Solution:

Q.4.1 Calculate the level of autonomous spending:

$Autonomous\; spending\;(A_{o} ) =Autonomous\; Consumption\;(C_{o}) +Autonomous\; Investment\;(I)$

$A{o} =R\;285\;Million +R\;300\;Million$

$A{o} =R\;585\;Million$

Q.4.2 Calculate the size of the multiplier:

$Multiplier=\frac{1}{(1-MPC) }$

$Multiplier=$ $\frac{1}{(1-0.4) }$

$Multiplier=\frac{1}{0.6} =1.67$

Q.4.3 Calculate the equilibrium level of income:

Equilibrium:

$Y=$ $\frac{1}{(1-MPC) } (C{o} +I)$

$\frac{1}{(1-0.4) } (285 +300)$

$1.67(585) =R\;976.95\;Million$

$Equilibrium \;level \;of \;income=R\;976.95\;Million$