Consider the Income-Expenditure Identity in a Closed Economy, Y =

question 16

Essay

Consider the income-expenditure identity in a closed economy, Y = C + I + G. Suppose consumption is always a fraction MPC of income, C = MPC×Y.
a. Show that income Y is equal to (I + G)/(1 - MPC).
b. Show that an increase in G by an amount ÄG increases income by ÄG/(1 - MPC) when investment is considered constant with respect to Y. What is the ratio 1/(1 - MPC) called?

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Definitions:

Subconscious

The part of the mind that is not fully aware but influences actions and feelings.

Reality

The state or quality of having existence or substance; the world or state of things as they actually exist.

Social Behaviorists

Scholars and psychologists who study how individuals' behaviors and personalities are shaped by their social environment and interactions.

Radical Behaviorists

Emphasize the study of observable behavior and the environment's role in shaping behavior, often excluding internal processes like thoughts and emotions.