In an economy with no exports and imports, autonomous consumption is $4 trillion

Question

In an economy with no exports and imports, autonomous consumption is $4 trillion, the marginal propensity to consume is 0.6, investment is $6 trillion, and government expenditure on goods and services is $3 trillion. Taxes are $2 trillion and do not vary with real GDP. Investment increases by $1.0 trillion. Calculate the change in equilibrium expenditure and the multiplier. The AE curve shifts upward by $1 trillion. Answer to 1 decimal place. The multiplier is 2.5 Answer to 1 decimal place. Equilibrium expenditure changes by tillion Answer to 2 decimal places.

Explanation / Answer

Answer : Multipler = Change in Equilibrium expenditure/ Change in Autonomous expenditure

Multipler = 2.5

Change in Autonomous expenditure = $1 trillion

2.5×$1000000000000 = Change in Autonomous expenditure

$0.025 trillion = Change in Autonomous expenditure

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