if: C = 120 + 0.8Y, I = 200 + 0.05i and Y = 1400, What is the size of government expenditure multiplier and savings?
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Expert's answer
2015-03-19T11:32:25-0400
We can use the following formulas: Government expenditure multiplier = 1 / (1-MPC) MPC is the marginal propensity to consume Government expenditure multiplier = 1 / (1-0.8) = 5 We have the consumption function in the form C = a + MPC (Y) that autonomous consumption is a. The savings function is S = -a + (1 – MPS) (Y) So, the saving function is: S = -120 + 0.2 Y S = -120 + 280 = 160
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