Table 13.1.Canada's Saving,Investment,Import,and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
Export Function X = 3000
Investment Function I = 1000
Saving Function S = -1000 + 0.2Y
Import Function M = 500 + 0.25Y
-Refer to Table 13.1.If improved business optimism leads to increases in Canada's planned investment spending from $1000 billion to $1200 billion,Canada's equilibrium income rises by approximately:
A) $444 billion
B) $555 billion
C) $666 billion
D) $777 billion

Question

Quizplus · Accepted Answer

The correct answer is A because the increase in investment spending leads to an increase in aggregate demand, which in turn leads to an increase in equilibrium income. The multiplier effect is 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, MPC is 0.2, so the multiplier is 1/(1-0.2) = 1.25. Therefore, the increase in investment spending of $200 billion leads to an increase in equilibrium income of $200 billion * 1.25 = $250 billion.

Table 131Canada's Saving,Investment,Import,and Export Functions (In Billions of Dollars) Under a a System