Question

Using \[\Delta Y=\frac{\Delta A}{1-mpc}\], a fall in aggregate consumption expenditure of 75 (i.e., \[\Delta A=-75\]) with mpc = 0.5 changes equilibrium income by:

Options

• A fall of 75 (income drops from 250 to 175)

• A fall of 150 (income drops from 250 to 100)

• A fall of 375 (income drops from 250 to −125)

• A rise of 150 (income rises from 100 to 250)

Answer 1

Applying \[\Delta Y=\frac{\Delta A}{1-mpc}=\frac{-75}{1-0.5}=-150\]. Equilibrium income falls by 150, from \[Y_1^*=250\] to \[Y_2^*=100\], while aggregate savings stay at 10.