Question

Suppose that consumers have an average MPC of 0.75. However, 20% of their income goes to the government in the form of taxes. Furthermore, 25% of disposable income is spent on foreign goods and services rather than domestic goods. Suppose that the government consumes $750 billion, investment is $500 billion, and exports are $250 billion. Autonomous consumption is also $500 billion. How large is the expenditure multiplier

Answer 1

Answer: 1.67

Step-by-step explanation:

The following can be gotten from the question:

MPC = 0.75

Taxes = 20% = 0.2

Income spent for foreign goods = 25% = 0.25

Then we slot the values into the GDP formula. This will be:

GDP = C+I+G+NX

GDP = C+0.75(Y-0. 2Y)+G+I+NX-0. 25(Y-0. 2Y)

Y = C+0.75(0.8Y)+G+I+NX-0.25(0.8Y)

Y = C+0.6Y+G+I+NX-0. 2Y

Collect like terms

Y = C+I+G+NX+0.6Y-0.2Y

Y= C+I+G+NX+0.4Y

Y-0. 4Y = C+I+G+NX

Y(1-0.4) = C+I+G+NX

0.6Y = C+I+G+NX

Divide through by 0.6

0.6Y/0.6 = 1/0.6(C+I+G+NX)

Y = 1.67(C+I+G+NX)

The expenditure multiplier is 1.67