A. In an AE model with MPC = 0.80, the government increases spending by $100 million. What will be the increase in equilibrium Y in the Keynesian AE model?

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Business

Derek Sharp

23 August, 01:50

A. In an AE model with MPC = 0.80, the government increases spending by $100 million. What will be the increase in equilibrium Y in the Keynesian AE model?

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Dalia Ware · Answer 1

increase in equilibrium Y in the Keynesian AE model = 500

Explanation:

Formula AE Model = ΔY = 1/1-C * ΔG

Where ΔY = Change in National Income

Marginal Propensity to Consume = 0.80

Change in government spending = 100

ΔY = 1/1-0.8*100 = 1/0.2*100 = 5*100 = 500