One more MPC problem?
I have one more problem on MPC
The federal government buys $10 million dollars worth of aircraft engines from GM. The price level does not change and the MPC is .8, what will be the impact on national income. The big problem I'm having is deciding which equation to use
The first one which is the one I think I should use is .8 = 10/X that would give me 12.5 million.
I found in my notes another equation which is 10 * 1/(1-.8) and that gives me 50
Which one is right? I think it’s the first one because MPC = change in spending/change in income. All the problem asks is what is the impact on national income.
Answer:
50 is right you have the initial expenditures of 10 this goes into people's hands they then spend 8 million of that. This goes into someone elses hands and they spend 8*.8 of that and so on. This is a geometric series. 1/(1-.8) is the solution to a geometric series like this
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The federal government buys $10 million dollars worth of aircraft engines from GM. The price level does not change and the MPC is .8, what will be the impact on national income. The big problem I'm having is deciding which equation to use
The first one which is the one I think I should use is .8 = 10/X that would give me 12.5 million.
I found in my notes another equation which is 10 * 1/(1-.8) and that gives me 50
Which one is right? I think it’s the first one because MPC = change in spending/change in income. All the problem asks is what is the impact on national income.
Answer:
50 is right you have the initial expenditures of 10 this goes into people's hands they then spend 8 million of that. This goes into someone elses hands and they spend 8*.8 of that and so on. This is a geometric series. 1/(1-.8) is the solution to a geometric series like this
More Questions and Answers: