Question

assume that the marginal propensity to consume is 0.8. if the government increases its purchases of goods and services by $200 and exports decline by $50, at most the equilibrium level of income will

Answer 1

The equilibrium level of national income is determined by the Keynesian model, where government spending and exports changes impact the aggregate expenditure. This analysis involves the calculation of the spending multiplier based on the marginal propensity to consume and how it affects the equilibrium considering all provided economic factors.

Step-by-step explanation:

The question at hand involves the concept of the Keynesian multiplier and how changes in government spending and exports affect the equilibrium level of national income. With a marginal propensity to consume (MPC) of 0.8, each dollar spent by the government has a multiplied effect on income. However, this is partially offset by a decrease in net exports due to the decline in exports by $50. To compute the net change in equilibrium income, we also need to consider the other values provided like taxes, marginal propensity to save, level of investment, and the level of imports and exports initially. Once these are taken into account, we can calculate the equilibrium using the formula for aggregate expenditure (AE) and set it equal to real GDP or national income (Y).

Firstly, we need to address the calculation of the aggregate expenditure (AE) function. In this context, the function would include consumption (C), investment (I), government spending (G), and net exports (exports minus imports). The consumption function could be expressed as the autonomous consumption plus induced consumption, which is MPC multiplied by the disposable income (after taxes). Equilibrium in the Keynesian model is reached when AE equals Y. From the values given, we can construct AE as follows: AE = C + I + G + X - M.

Assuming all other factors are constant, and without carrying out the actual calculation, the increased government spending would contribute to a potential increase in the equilibrium national income by $200 multiplied by the spending multiplier (1 / (1 - MPC)). However, the reduction in exports reduces this impact by $50 multiplied by the same multiplier. To find the exact equilibrium level, we would have to solve for Y where AE equals Y using the given consumption function and import function along with the changes in G and X.

Answer 2

After applying the government spending multiplier, the equilibrium level of income will increase by $750, given the marginal propensity to consume of 0.8 and the net change in spending. Therefore, the correct answer to the question is:

(D) increase by $750.

The marginal propensity to consume (MPC) is 0.8. Given this information, we can calculate the impact on the equilibrium level of income using the government spending multiplier. The formula for the multiplier is:

`\[ \text{Multiplier} = \frac{1}{1 - \text{MPC}} \]`

With an MPC of 0.8, the spending multiplier would be:

`\[ \text{Multiplier} = (1)/(1 - 0.8) = (1)/(0.2) = 5 \]`

Now, let's apply the multiplier to the net change in autonomous spending. The government increases its purchases by $200, and exports decline by $50, so the net increase in spending is $150 ($200 - $50).

The overall change in the equilibrium level of income will be the net change in spending multiplied by the multiplier:

`\[ \text{Change in Equilibrium Income} = \text{Multiplier} * \text{Net Change in Spending} \]`

Let's calculate the change in equilibrium income.

After applying the government spending multiplier, the equilibrium level of income will increase by $750, given the marginal propensity to consume of 0.8 and the net change in spending. Therefore, the correct answer to the question is:

(D) increase by $750.

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