Question

a)     A simple closed economy with an mpc equal to 0.5. Investment spending has suddenly fallen, reducing aggregate demand and output to a level that is 100 million below Y*.

                  

               iii.           If the government decided to try to get the economy back to full employment using only an increase in transfers, how large would this increase need to be?

Answer 1

change in Y / change in R = 1. When change in Y = 100, change in R = 100. Thus, transfers must be increased by 100 million to increase national income by 100 million.