Question

A. In an AE model with MPC = 0.80, the government increases spending by $100 million. What will be the increase in equilibrium Y in the Keynesian AE model?

Answer 1

Answer:

increase in equilibrium Y in the Keynesian AE model = 500

Explanation:

Formula AE Model = ΔY = 1/1-C * ΔG

Where ΔY = Change in National Income

            Marginal Propensity to Consume =0.80

            Change in government spending =100

ΔY = 1/1-0.8*100 = 1/0.2*100 = 5*100 = 500