Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r + )
-Suppose that the baseline investment level increases by $200 billion. The new equilibrium level of national income would be

Question

Assume that the economy's marginal propensity to expend is 0.6, the initial baseline level of autonomous spending is $4000 billion, a one percentage point increase in the real interest rate will reduce the sum of investment and gross exports by $100 billion the inflation rate is 2%, and the LM curve is Y=$1500 + $1000 x (r +    )
-Suppose that the baseline investment level increases by $200 billion. The new equilibrium level of national income would be

Quizplus · Accepted Answer

To determine the new equilibrium level of national income when the baseline investment level increases, we use the multiplier effect formula. The multiplier effect suggests that an initial increase in spending will lead to a larger increase in the overall national income. The formula for the multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. Without the specific MPC value or the multiplier itself, we cannot directly calculate the answer. However, the principle is that an increase in investment leads to a multiplied increase in the overall national income due to the cycle of spending that follows the initial investment. Among the provided options, $9100 billion represents a significant increase that could be reflective of the multiplier effect in action, assuming a realistic multiplier value and an initial economy size where a $200 billion increase could plausibly lead to such an expansion in the national income. This question seems to assume familiarity with the multiplier effect and its impact on the economy, but without specific figures or a clear context, the answer is based on understanding economic principles rather than a direct calculation.

Assume That the Economy's Marginal Propensity to Expend Is 0