Question

If 𝐶̅ = R25 billion, I = R35 billion and c = 0.80

The marginal propensity to save is …

[1] 0.80

[2] 1

[3] 1.20

[4] 0.20

The value of the multiplier is …

[1] 5

[2] 0.20

[3] 1

[4] 2

The equilibrium level of income is …

[1] 60

[2] 120

[3] 300

[4] 90

Answer 1

Solution:

a.). The marginal propensity to save is 4.) 0.20.

c = MPC = 0.8

MPS = 1 – MPC = 1 – 0.8 = 0.2

b.). The value of the multiplier is 1.). 5.

Multiplier = $\frac{1}{(1 - MPC)} = \frac{1}{(1 - 0.8)} = \frac{1}{0.2} = 5$

 

c.). The equilibrium level of income is 3.). 300.

At equilibrium: AD = AS

Y = C + I + G

C = 25 + 0.80Y

I = 35

Y = C + I

Y = 25 + 0.80Y + 35

Y – 0.8Y = 25 + 35

0.2Y = 60

Y = $\frac{60}{0.2} = 300$

The equilibrium level of income (Y) = 300 billion.