Question

Suppose in a country investment increases by US $.100 and

consumption is given by C = 10 + 0.6Y (where C = consumption and
Y = income). How much increase will there take place in income

Answer 1

Step-by-step explanation:

To determine the increase in income resulting from a US $100 increase in investment, we need to use the Keynesian expenditure multiplier.

The Keynesian expenditure multiplier formula is:

1 / (1 - MPC)

Where MPC is the marginal propensity to consume, which is the change in consumption resulting from a change in income.

In this case, the consumption function is given by C = 10 + 0.6Y, so the MPC is 0.6.

Thus, the Keynesian expenditure multiplier is:

1 / (1 - 0.6) = 2.5

This means that a US $100 increase in investment will lead to a total increase in spending of 2.5 times that amount, or US $250.

To determine the increase in income resulting from this increase in spending, we can use the income-expenditure equilibrium formula:

Y = AE

where Y is income and AE is aggregate expenditure.

Since AE = C + I (where I is investment), we have:

AE = C + I

AE = (10 + 0.6Y) + 100

AE = 110 + 0.6Y

Setting AE equal to Y, we get:

Y = 110 + 0.6Y

Solving for Y, we get:

Y = 275

Therefore, the increase in income resulting from a US $100 increase in investment is US $275.