It is estimated that a particular economy has a
multiplier of 2. The marginal propensity
to import...

Question

It is estimated that a particular economy has a
multiplier of 2. The marginal propensity
to import of the economy is 0.3, while the consumer's marginal propensity to save is 0.2.

(a)
Find
the marginal tax rate of this economy.

(b)
The
marginal propensity to import increases from 0.3 to 0.4. Find the new
multiplier of the economy and explain why the multiplier has changed.

Robert · Accepted Answer

1
Introduction to Economics
Assignment 
1. In a closed economy, investment is autonomous at a level of £500, while 
consumption is comprised of autonomous consumption of £50, as well as 90% 
of disposable income. There is no government sector. 
(a) What is the equilibrium level of income? [5 marks]
Consumption function: C= 50+.9Y
I= 500
In equilibrium C+I= Y
50+500+.9Y= Y
Y= 550/.1 =5500
(b) What would equilibrium income be if investment increased by £50?
[5 marks]
If I becomes 100 then 
Y= 500+.9Y +100
Y= 600/.1 =6000
This can also be seen with the multiplier= 1/(1-mpc) = 1/( 1-.9) =1/.1 =10
As I rises by 50 GDP will rise by 10*50=500
This has happened as Y has risen from 5500 to 6000
(c) Explain what the multiplier of an economy is and calculate the value of the multiplier in this economy, given the change in investment.

It is estimated that a particular economy has a multiplier of 2. The marginal propensity to import of the economy is 0.3, while the consumer's marginal propensity to save is 0.2. (a) Find the marginal...

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