Answer to Question #236564 in Macroeconomics for MacroStudent

Question

If 75% of any increase in income is spent on consumption, then an increase in autonomous investment of R1 billion results in an increase in national income of as much as

R5 billion

R1.33 billion

R4 billion

R6 billion

Answer 1

MPC=0.75 or 75%=m

MPC= mC/mY

MPS+MPC=1

Y=C+I+G

but C=mY

Therefore, Y=mY+I+G

Factoring out; Y=(I+G)/(1-m)

Differentiating with respect to Investment:

therefore, Y=1/(1-m)

Y=1/0.25=4

this is the multiplier effect meaning that a unit increase in autonomous investment leads to an increase in national income by four units. therefore an increase in autonomous investment by R 1billion leads to increase in national income by R 4billion.