Answer:
Explanation:
(a)
mpe = 0.8
Autonomous investment = $1,100
Autonomous government spending = $8,100
Autonomous consumption = $9,000
Autonomous net exports = $900
At equilibrium,
Y = Autonomous consumption + [mpe * Y] + Autonomous government spending + Autonomous investment + Autonomous net exports
Y = 9000 + 0.8Y + 8100 + 1100 + 900
Y = 0.8Y + 19100
Y - 0.8Y = 19100
0.2Y = 19100
Y = 19100/0.2 = 95500
The level of income is $95,500.
(b)
Now, autonomous exports increases by $1,500.
mpe = 0.8
Autonomous investment = $1,100
Autonomous government spending = $8,100
Autonomous consumption = $9,000
At equilibrium,
Y = Autonomous consumption + [mpe * Y] + Autonomous government spending + Autonomous investment + Autonomous net exports
Y = 9000 + 0.8Y + 8100 + 1100 + 2,400
Y = 0.8Y + 20600
Y - 0.8Y = 20600
0.2Y = 20600
Y = 20600/0.2 = 103000
Thus,
The income rises by $7,500.
(c)
Now, mpe decreased from 0.8 to 0.6
mpe = 0.6
Autonomous investment = $1,100
Autonomous government spending = $8,100
Autonomous consumption = $9,000
Autonomous net exports = $900
At equilibrium,
Y = Autonomous consumption + [mpe * Y] + Autonomous government spending + Autonomous investment + Autonomous net exports
Y = 9000 + 0.6Y + 8100 + 1100 + 900
Y = 0.6Y + 19100
Y - 0.6Y = 19100
0.4Y = 19100
Y = 19100/0.4 = $47,750
The level of income is $47,750.
Now, autonomous exports increases by $1,500.
mpe = 0.6
Autonomous investment = $1,100
Autonomous government spending = $8,100
Autonomous consumption = $9,000
At equilibrium,
Y = Autonomous consumption + [mpe * Y] + Autonomous government spending + Autonomous investment + Autonomous net exports
Y = 9000 + 0.6Y + 8100 + 1100 + 2400
Y = 0.6Y + 20600
Y - 0.6Y = 20600
0.4Y = 20600
Y = 20600/0.4 = 51500
Thus,
The income rises by $3,750.
