If exogenous investment falls by USD 40 billion and the MPC is 8/11 and there is...

If exogenous investment falls by USD 40 billion and the MPC is 8/11 and there is a multiplier effect, then:

a. short-run equilibrium output falls by 11/8 x USD40 billion.

b. None of the other 4 choices.

c. short-run equilibrium output falls by 11/3 x USD40 billion.

d. short-run equilibrium output by 3 x USD40 billion.

e. short-run equilibrium output by 8/3 x USD40 billion.

Solutions

Expert Solution

Let change in exogenous investment be represented by . Exogenous investment falls by USD 40 billions that

means . MPC as per the question is . Let change in equilibrium output be represented by . So, when investment falls there exists a multiplier effect such that :

This can be written as:

Substituting values of and in gives

When investment fall ,equilibrium output also fall because the sign of will be negative.

As per the above results it is clear that short run equilibrium output falls by 11/3 * USD 40 billion.

Rahul Sunny answered 1 year ago

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