Question

Consider the following information on aggregate income, consumption expenditure, and planned investment for a country: When aggregate income is $2,100, ___. A. saving is $600 and unplanned investment (inventory change is $200. B. saving is -$600 and unplanned investment (inventory change is $400. c. saving is $200 and unplanned investment (inventory change) is $400. D. saving is $40 and unplanned investment (inventory change) is $200. The equilibrium level of output/income is $. (Enter your response as an integer.) Based on the information above, calculate the MPC and MPS. MPC =. (Round your response to two decimal places.) MPS =. (Round your response to two decimal places.) The investment multiplier is. Enter your response as an integer.) Suppose there is no change in the level of the MPC and the MPs and planned investment jumps by $400. Calculate the change in the equilibrium value of income/output. The change in equilibrium income/output is $. (Enter your response as an integer.)

Answer 1

Using the Keynesian model, we calculated the marginal propensity to consume (MPC) as 0.8 and the marginal propensity to save (MPS) as 0.2. The investment multiplier is 5. An increase in planned investment by $400 leads to a change in equilibrium income/output by $2,000.

Step-by-step explanation:

In the model presented, consumption will happen even if income is zero, set at $600. From this, we deduce that the marginal propensity to consume (MPC) is 0.8, meaning that for each additional dollar of income, consumption increases by $0.80. Simultaneously, the marginal propensity to save (MPS) is 0.2, indicating that for every extra dollar of income, savings increase by $0.20. The investment multiplier, which is the reciprocal of MPS (1/MPS), would be 5, considering 1 divided by 0.2 equates to 5.

When planned investment increases by $400 and there's no alteration in MPC or MPS, the total change in equilibrium income/output is computed by multiplying the increment in investment by the investment multiplier. So, the change in equilibrium income/output would be $400 multiplied by the investment multiplier of 5, which equals $2,000.