consider an Island country called Arcadia assume that the aggregate price level is constant, the interest...
consider an Island country called Arcadia assume that the aggregate price level is constant, the interest rate is fixed and there are no taxes in this country. according to scenario 1 assume that an increase of 300 in autonomous investment leads to an increase of 750 in equilibrium income. if the MPI is 1/10, the MPS must be?
A. 0.60
B. 0.50
C.0.30
D.0.25
Homework Answers
Answer
Multiplier =1/(MPS+MPI)
and also
Multiplier =change in income/change in autonomous spending
multiplier =750/300
=2.5
then from the first equation
2.5=1/(MPS+0.1)
2.5MPS+0.25=1
2.5MPS=0.75
MPS=0.75/2.5=0.3
the MPS is 0.3
Option C
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