Answer:
a. Increases by 1000 to 9800
b. Increases by 900 to 9700
c. Decreases by 1000 to 7800
Explanation:
The multiplier in economics is a concept that measures the rate of change in output as a result of a unit change in spending. In other words, it explains that a given change in consumption or investment spending will result in a greater change in aggregate output, thus called multiplier
a. Given Y*=8800 in the question and Multiplier= 10, we can calculate the effect of a 100 unit increase in government purchases:
∆Y/∆G=1/(1-MPC)= 10
Thus, ∆Y/100=10
∆Y=1000 ; Thus if government purchases increases by 100, economic output increases by 1000, from 8800 to 9800 (8800+1000).
b. A decrease in tax collections from 1,500 to 1,400 implies 100 units tax reduction
The tax multiplier is given as
∆Y/∆T=(-mpc)/(1-mpc)
Mpc = 0.9, (it was gotten from consumption equation C)
Thus, ∆Y/(-100)=(-0.9)/(1-0.9)
∆Y/(-100)=-9
∆Y= 900; This is an increase in output.
Thus, a decrease in tax collections by 100 increases economic output by 900 to 9700 (8800+900)
c. A decrease in planned investment spending by 100 from 1,000 to 900 is evaluated thus:
(∆Y/∆I)= 1/(1-MPC)= 10
∆Y/(-100)= 10
∆Y= -1000; This implies a decrease in economic output by 1000 from 8800 to 7800 (8800-7800)
Thus, a decrease in planned investment spending by 100 from 1,000 to 900 decreases economic output to 7800
NOTE: MPC is marginal propensity to consume. It is the slope of the consumption function.
