Equilibrium level of income? (1 Viewer)

[christopher8827]

Can someone please explain this question?

http://i50.tinypic.com/30a6poz.png

I know how MPC increases the multiplier but what is the effect on the equilibrium level of income (what is it exactly)?

 

[kwu1]

The multiplier effect magnifies any change in spending e.g. Increased C or I or G. If the multiplier increases that means there will be greater circulation of funds in income and therefore, equilibrium income will rise.

 

[christopher8827]

What the equation for equilibrium income?

 

[freeeeee]

^ the guy up here said everything needed:

But here is how i understand it, as i didnt get it until a friend explained it to me

The mutiplier effect is defined as the process where one individual's consumption becomes part of another individuals income. This second individual then re-spends some of this inital money and also saves a proportion of it. The process then continues.

So the formula for equilibirum of income is when aggregate supply = aggregate demand
Y = AD
therefore Y = C + I + G + (X-M), Aggregate supply is the total level of income within an economy over a period of time (typically 1 year)
Therefore If any spending occurs ( C + I + G) there will be a magnified effect due to the multiplier.

 

[christopher8827]

OHH... I understand it now, thanks.

 

[freeeeee]

great =D ^