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Macroeconomic concepts for national income

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?

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