If equilibrium income is $500 billion, MPC = 0.8, MPI = 0.2 and autonomous government spending increases by $20 billion, the new equilibrium income will be _____.

Question

Quizplus · Accepted Answer

Autonomous government expenditure will increase the equilibrium income in the economy by the formula of ΔY = ΔG × 1/(1-MPC) where MPC is the marginal propensity to consume.
ΔY = 20 billion × 1/(1-0.8) 
ΔY = 20 billion × 1/0.2
ΔY = 100 billion
The new equilibrium income will be:
Y = Ye + ΔY
Y = 500 billion + 100 billion
Y = 600 billion
Therefore, the new equilibrium income will be $550 billion.

If Equilibrium Income Is $500 Billion, MPC = 0