An Analysis of Multiplier and Equilibrium Expenditure in an Economy

The Relationship Between Multiplier and Equilibrium Expenditure

An economy with no imports and no taxes operates with a marginal propensity to save of 0.2. In this scenario, an increase in autonomous expenditure can have a significant impact on equilibrium expenditure. The multiplier plays a crucial role in determining the extent of this impact.

The Calculation Process

A $60 billion increase in autonomous expenditure will result in a change in equilibrium expenditure. To calculate this change, we can use the multiplier formula:

Multiplier = 1 / (1 - Marginal Propensity to Consume)

Since there are no imports and no taxes, the Marginal Propensity to Consume (MPC) is equal to 1 - Marginal Propensity to Save, which is 1 - 0.2 = 0.8. Therefore, the multiplier is:

Multiplier = 1 / (1 - 0.8) = 5

When autonomous expenditure increases by $10 billion, the equilibrium expenditure will increase by:

Increase in Equilibrium Expenditure = Increase in Autonomous Expenditure x Multiplier = 5 x $10 billion = $50 billion

Thus, a $60 billion increase in autonomous expenditure will lead to:

Change in Equilibrium Expenditure = $60 billion / $10 billion x $50 billion = $300 billion

Understanding the Multiplier

The multiplier value for this economy is 5, which indicates the extent of the impact autonomous expenditure has on equilibrium expenditure. In this case, the correct response to the given query is:

Option C. $48 billion; 1.25

What is the relationship between the multiplier and equilibrium expenditure in an economy with no imports and no taxes, considering a marginal propensity to save of 0.2?

The multiplier value in this scenario is 5, which means that an increase in autonomous expenditure will result in a $300 billion increase in equilibrium expenditure. The correct response to the query is option C: $48 billion; 1.25.