Help - multiplier! (1 Viewer)

[JoeyDW]

The table shows national accounts data for Consumption (C) and National Income (Y) in
$ billion for an economy.
Year C ($bn) Y ($bn)
1 . 110 . 150
2 . 200 . 300


What is the new equilibrium level of income (Y) in Year 3 if investment increases by $40bn?
(A) $360bn
(B) $367bn
(C) $400bn
(D) $420bn

 

[deswa1]

1. Calculate the MPC by looking at the change in consumption over the change in income
2. Calculate the multiplier using the formula: k=1/(1-MPC)
3. Multiply $40bn by k to get the increase in equilibrium level of income
4. Add that to $300 bn

 

[JoeyDW]

I understand everything bar the first part... :\

 

[tarod]

MPC = change in C / change in Y

= 90/ 150 = 0.6

k (multiplier) = 1/ (1-0.6) = 1/0.4 = 2.5

Investmetnt = 2.5 * 40 = 100

Now, Y = 300 + 100 = 400 (c)

For the first part, you can generally just memorise that MPC = change in C/ change in Y (I don't think you're ever required to go deeper into this)

But MPC is the proportion of every extra dollar (of income) spent on consumption and this gives you the formula as above.

In addition, if you can recall the consumption function graph (x axis = national income, y axis = expenditure/ consumption), the gradient of that line is rise/ run = change in C/ change in Y, giving you MPC

 

[JoeyDW]

thank you that helped so much !