Question

Why is the answer 84.03 and how is it calculated?

Q: Suppose that equilibrium income is 3200 and the multiplier is 2.38. Equilibrium income would rise to 3400 if government spending was?

A= 84.03

Answer 1

It is given that the multiplier is 2.38.

Initial equilibrium income is 3,200 and it rises to 3,400. There is an increase in the equilibrium income by 200.

To calculate the government spending needed increase the income by 200 when multiplier is 2.38, the following formula can be used:

$\fn_phv \Delta Y=K\times \Delta G$

Where ∆Y represents the change in income.

K is the value of multiplier.

∆G represents the change in government spending.

Putting the values:

$\fn_phv \Delta G=\frac{\Delta Y}{K}$

$\fn_phv \Delta G=\frac{200}{2.38}$

$\fn_phv \Delta G=84.03$

Therefore, government spending was 84.03.