Question

If an economy's MPC is 0.95 and the marginal propensity to import is 0.15, then an increase in government spending of $1,000 will increase income by Group of answer choices

Answer 1

Income will increase by $5,000.

Step-by-step explanation:

From the question, we have:

MPC = 0.95

MPI = marginal propensity to import = 0.15

Amount of increase in government spending = $1,000

Therefore, we have:

Multiplier with imports = 1 / (1 - (MPC - MPI)) ....................... (1)

Substitute the values into equation (1), we have:

Multiplier with imports = 1 / (1 - (0.95 - 0.15)) = 1 / (1 - 0.80) = 1 / 0.20 = 5

Therefore, we have:

Amount of increase in income = Amount of increase in government spending * Multiplier with imports = $1,000 * 5 = $5,000

Therefore, income will increase by $5,000.