Question

The Kenya National Bureau of statistics has made the following estimates for the
Kenyan economy;-Marginal propensity to consume (MPC) = 0.25, Investment (I) = 5500, Government spending (G) = 12000, Autonomous consumption (α) = 1500, Net Exports (X-M) = 3500
Y= C+ I + G + X-M
C= α + βY
Required;-
i) Calculate the equilibrium level of National Income.
ii) Calculate the equilibrium consumption and savings.
iii) Compute a simple investment multiplier and interpret it

Answer 1

Answers-----

(1) Equilibrium level of National income=$30000

Calculations--------

Equilibrium level of income/ output / employment is achieved when AD=AS

Where AD= aggregate demand= consumption (C)+ Investment (I)+ govt expenditure (G) + net exports (X-M)

AS = aggregate supply=Y=C+S

In the question-------

C= 1500+0.25y  (as C= autonomous consumption + MPC*Y)

I= 5500

G= 12000

X-M=3500

Y= 1500+.25y+5500+12000+3500

.75y=22500

Y=22500/.75=30000

(2) Consumption at equilibrium=$ 9000

Savings=$21000

​​​​​​​Calculations---------

C= Alfa+ beta Y

Where Alfa= autonomous Consumption= 1500

Beta= Mpc=.25

Y at equilibrium =3000

So C= 1500+.25(30000)

1500+7500=9000

# saving(S)= y-c

3000-900=2100

(3) Simple investment Multiplier (K)=1.33

Calculations--------

K=1/1-mpc

As MPC=.25

So, k= 1/1-.25=4/3=1.33

Interpretation of k---

K=1.33 stands for----- income Multiplies by 1.33 times by increasing investment in the economy.

Simply we can say that income multiplies 1.33 times when ratio of increase in consumption to increase in income is .25