Question

Congratulations again. You've just been appointed economic adviser to the president of Examland. The mpe is 0.8; autonomous investment is $1,100; autonomous government spending is $8,100; autonomous consumption is $9,000; and autonomous net exports are $900. Instructions: Enter your response rounded to the nearest whole number. a. What is the equilibrium level of income in the country? Level of income: S b. Autonomous net exports increase by $1,500. What will happen to income? Incomerises by S C. You've just leamed the mpe changed from 0.8 to 0.6. How will this information change your answers in a and b? Instructions: Enter your response rounded to the nearest whole number. Level of income: S Income drops

Answer 1

The initial equilibrium income of Examland is $99,000. An increase in autonomous net exports by $1,500 will raise income by $7,500. If MPC changes to 0.6, the new equilibrium income becomes $49,750, and the same net exports increase would raise income by $3,750.

Step-by-step explanation:

To determine the equilibrium level of income in Examland, we use the formula of the Keynesian cross model, where equilibrium occurs when aggregate output (income, Y) equals aggregate expenditure (AE).

AE is composed of autonomous consumption, investment, government spending, and net exports. The equation for aggregate expenditure with the given data is AE = autonomous consumption + autonomous investment + autonomous government spending + autonomous net exports. Initially we have AE = $9,000 + $1,100 + $8,100 + $900.

Using the multiplier effect, where the multiplier (k) is equal to 1 / (1 - MPC), and here MPC is 0.8, so multiplier k = 1 / (1 - 0.8) = 5. The equilibrium level of income is found where Y = AE, initially Y = 5 * ($9,000 + $1,100 + $8,100 + $900) = $99,000.

If autonomous net exports increase by $1,500, it would cause AE to increase and thus increase income by the multiplier times the rise in net exports, which is $1,500 * 5 = $7,500.

If the MPC changes to 0.6, the new multiplier k' = 1 / (1 - 0.6) = 2.5. The new equilibrium income with the initial data would be Y = 2.5 * ($9,000 + $1,100 + $8,100 + $900) = $49,750. The income rise due to an increase in net exports by $1,500 would now be $1,500 * 2.5 = $3,750.