Assume a model of the expenditure sector with no government or foreign sector.If the savings function is defined as S = - 300 + (0.1)Y and autonomous investment increases by 200, by how much will consumption increase?

Question

Quizplus · Accepted Answer

In this model, the marginal propensity to save (MPS) is 0.1, which means the marginal propensity to consume (MPC) is 1 - MPS = 0.9. An increase in autonomous investment by 200 leads to an increase in income (Y) by the multiplier effect. The multiplier is 1/(1 - MPC) = 1/(1 - 0.9) = 10. Therefore, the increase in income is 200 * 10 = 2,000. Since the MPC is 0.9, the increase in consumption is 0.9 * 2,000 = 1,800.

Assume a Model of the Expenditure Sector with No Government