Answer to Question #237635 in Macroeconomics for 4 Billion

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

The 75% of any increase in income is spent on consumption means the marginal proprnsity to consume(mpc) is 0.75.

Multiplier(k) = 1 / (1 - mpc) = 1 / (1 - 0.75)

Or,  Multiplier(k) = 1 / 0.25 = 4

Now, the increase in autonomous investment (I) is R1 billion.

The increase in national income (Y) will be as follows, Y = [1 / (1 - mpc)] * I

Y = 4 * R1 billion = R4 billion

So, the national income will increase by 4 times of R1 billion or R4 billion.

An increase in autonomous investment of R1 billion results in an increase in national income of R4 billion.