Question

In Macroland, if when output Y increases by 1000, consumption increases by 700, planned investment increases by 100 and imports increase by 50 with all other components of planned aggregate expenditures constant, then the marginal propensity to consume out of Y is _____ and the marginal expenditure rate is _____.

Answer 1

The marginal propensity to consume (MPC) out of output (Y) is 70% and the marginal expenditure rate (MER) is 80%.

Step-by-step explanation:

The marginal propensity to consume (MPC) out of output (Y) is calculated by dividing the change in consumption by the change in output.

In this case, when output (Y) increases by 1000, consumption increases by 700.

So the MPC is 700/1000

= 0.7 or 70%.

The marginal expenditure rate (MER) refers to the change in planned aggregate expenditures (AE) divided by the change in output (Y).

In this scenario, only consumption and planned investment are changing.

Consumption increases by 700 and planned investment increases by 100, so the change in AE is :

700 + 100

= 800.

The change in output is 1000.

Therefore, the MER is 800/1000

= 0.8 or 80%.