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Macroeconomic concepts for national income

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Congratulations. You've been appointed economic adviser to Happyland. Your research assistant says the country's mpe is .8 and autonomous expenditures (probably federal government spending) have just risen by $20.

1. What will be the actual dollar change in income and does it rise or fall?
2. Your research assistant comes in and says he's sorry but the mpe wasn't .8; it was .5. How does your answer change (in $ amounts)?
3. He runs in again and says exports have fallen by $10 and investment has risen by $10. How does your answer change (in $ amounts)?
4. Will the increase in autonomous expenditures be more likely to eventually lead to higher inflation or higher unemployment?
5. How could it possibly lower either inflation or unemployment?

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Solution Preview

1. See the attached graph. An increase in autonomous spending shifts the
The multiplier is 1/(1-mpe) = 5
The change in income is therefore 5 x 20 = $100

Income rises. An increase in autonomous expenditure (I, G or X) increases equilibrium by more than increase in autonomous expenditure.

2. Simply replace .8 with .5 to calculate the multiplier
1/(1-.5) = 2
Income increases by 20x 2 =$40.
Income has decreased by $60.

3. Changes ...

Solution Summary

Macroeconomic concepts for national income calculations based on MPE and autonomous expenditures