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)marginal propensity to save.
B)equilibrium level of national income.
C)reciprocal of the marginal propensity to spend.
D)simple multiplier.
E)average propensity to save.

Question

Quizplus · Accepted Answer

The simple multiplier is used in macroeconomic models to estimate the total effect of a given change in autonomous expenditure (such as investment) on equilibrium national income. It is calculated as 1/(1-MPC) or 1/MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. Therefore, the change in desired investment should be multiplied by the simple multiplier to estimate the total effect on equilibrium national income.

Consider a Simple Macro Model with a Constant Price Level