Question

In: Economics

5) Fill in the blanks in the table below. Assume that the MPC is constant over...

5) Fill in the blanks in the table below. Assume that the MPC is constant over everyone in the economy.

MPC

Spending multiplier

Change in Government Spending

Change in Income

10

50

2.5

-800

0.5

425

0.2

1200

Solutions

Expert Solution

MPC

Spending multiplier

Change in Government Spending

Change in Income

0.9

10

50

50*10 = 500

0.6

2.5

-800/2.5 = -320

-800

0.5

2

425

425*2 = 850

0.2

1.25

1200/1.25 = 960

1200

Notes:

Spending multiplier = 1/(1-MPC)

So, when spending multiplier is 10:

10 = 1/(1-MPC)

Or, 10-10MPC = 1

Or, -10MPC = 1-10 = -9

Or, MPC = -9/-10 = 0.9

So, when spending multiplier is 2.5:

2.5 = 1/(1-MPC)

Or, 2.5-2.5MPC = 1

Or, -2.5MPC = 1-2.5 = -1.5

Or, MPC = -1.5/-2.5 = 0.6

When MPC is 0.5 spending multiplier = 1/(1-0.5) = 2

When MPC is 0.2 spending multiplier = 1/(1-0.2) = 1/0.8 = 1.25

Change in income = change in government expenditure * spending multiplier.


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