Hey guys. Could i please have an explanation on how to do this question. I'm not sure. I dont even have the answer with me.
http://imgur.com/2E3YG
http://imgur.com/2E3YG
Multiple choice. Consumption function?? (1 Viewer)
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deswa1
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Well between year 1 and 2, income increased by 150 but consumption increased by 90 so the marginal propensity to consume is 90/150=3/5. Therefore the MPS is 2/5 and the multiplier is 1/MPS=5/2
So an increase in investment by $40bn will have a $40x5/2 increase in national income -> $100bn increase -> $300bn (C)
So an increase in investment by $40bn will have a $40x5/2 increase in national income -> $100bn increase -> $300bn (C)