Congratulations. You’ve been appointed economic adviser to Happyland. Your resea

Question

Congratulations. You’ve been appointed economic adviser to Happyland. Your research assistant says the country’s mpe is 0.6 and autonomous expenditures have just risen by $50.

a. What will happen to income?

Income will (Click to select increase or decrease )increasedecrease by $.

b. Your research assistant comes in and says he’s sorry but the mpe wasn’t 0.6; it was 0.5. How does your answer change?

The income will (Click to select increase or decrease )increasedecrease by only $.

c. He runs in again and says exports have fallen by $26 and investment has risen by $26. How does your answer change?

A. It doesn’t. The increase in investment cancels out the decrease in exports.

B. Income will increase by $76.

C. Income will increase by $65.

D. Income will increase by $91.

Explanation / Answer

a. What will happen to income?

since the MPC = .6 so the income will be affected accordingly

Increase in income = (1/1-MPC) Investment

= 1/.4 (50)

=$125

b. Your research assistant comes in and says he’s sorry but the mpe wasn’t 0.6; it was 0.5. How does your answer change?

Answer: 1/1-MPC (Investment)

=1.5 (50)

=100

c. He runs in again and says exports have fallen by $26 and investment has risen by $26. How does your answer change?

A. It doesn’t. The increase in investment cancels out the decrease in exports.

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