Consider a simple macro model with a constant price level and demand-determined output.Using this model,if economists want to estimate the effect of a given change in desired investment on equilibrium national income,they would multiply the change in desired investment by the
A)average propensity to save.
B)marginal propensity to save.
C)equilibrium level of national income.
D)simple multiplier.
E)reciprocal of the marginal propensity to spend.

Question

Quizplus · Accepted Answer

In a simple macro model, the effect of a change in desired investment on equilibrium national income is estimated by multiplying the change in desired investment by the simple multiplier. This is because the simple multiplier shows the change in equilibrium national income resulting from a change in autonomous expenditure such as desired investment. The formula for the simple multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. However, in a demand-determined output model, the MPC is equal to 1, making the simple multiplier equal to 1/(1-1) which is equal to 1. Hence, the change in desired investment equals the change in equilibrium national income.

Consider a Simple Macro Model with a Constant Price Level