Using appropriate graphs, explain how the following will affect the size of the autonomous expenditure multiplier,...

Using appropriate graphs, explain how the following will affect the size of the autonomous expenditure multiplier, other things being constant. (You can use the multiplier formula to assist your explanation.) (a) Decrease in marginal propensity to consume (b) Decrease in marginal propensity to import

Expert Solution

According to the simple Keynesian framework,

Y= C+I+G+X-M

Where Y is national income, C is consumption expenditure, I is investment expenditure, X is Export and M is import

I, G and X are exogenous variables and C= a+bY and M= u+vY, where b is marginal propensity to consume and v is the marginal propensity to import

After putting the values of C and M into national income accounting

Y= a+bY+I+G+X-u-vY

(1-b+v)Y= a+I+G+u

where is autonomous expenditure multiplier

(a) A decrease in marginal propensity to consume will reduce the aggregate expenditure through a contraction in consumption expenditure. hence Y goes down

(b) A decrease in marginal propensity to import will expand the aggregate expenditure through a reduction in import expenditure. hence Y goes up

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Rahul Sunny answered 1 year ago

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