Answer to Question #63445 in Macroeconomics for Francis Kariuku

Question #63445
Given a hypothetical consumption function of the form Y = C + I0 + G0 ,C = α + β Yd Where: Yd = Y – T, Y = Income, T = Taxes Government spending and investment are exogenously determined at G and I respectively. Assuming this model represent a three sectors economy, determine Investment multiplier, Government spending multiplier and Tax multiplier. If there is an increase in marginal propensity to consumer, how will this affect the national income?
Expert's answer
Y = C + I0 + G0, C = α + β Yd, where: Yd = Y – T, Y = Income, T = Taxes
Investment multiplier mi = 1/(1 - MPC) = 1/(1 - β).
Government spending multiplier in this case is the same as investment multiplier, so mg = 1/(1 - MPC) = 1/(1 - β).
Tax multiplier mt = MPC/(1 - MPC) = β/(1 - β).
If there is an increase in marginal propensity to consume, then the national income will decrease.

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