In a Keynesian open economy, suppose that the MPC = 0.8, the MPM = 0.10, and t = 0.25. If it is desired to increase national income by 125 through an increase in private investment, by how much will private investment have to increase in order to generate the 125 increase in income?

Question

Quizplus · Accepted Answer

Using the Keynesian open economy formula for determining the change in national income resulting from a change in private investment: ΔY = (ΔI / (1-MPC)) + (ΔX / (1-MPC-MPM)) - (ΔT / (1-MPM)), where ΔY is the change in national income, ΔI is the change in private investment, ΔX is the change in exports, and ΔT is the change in taxes.

Since there is no information given about changes in exports or taxes, we can assume they are held constant.

Therefore, to increase national income by 125, we need: 125 = (ΔI / (1-0.8)) + (0 / (1-0.8-0.1)) - (0 / (0.1))

Simplifying the equation: 125 = ΔI / 0.2

Solving for ΔI: ΔI = 125 * 0.2 = 25 * 4 = 100

Thus, private investment will have to increase by 100 to generate a 125 increase in national income.

In a Keynesian Open Economy, Suppose That the MPC =