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

question 220

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 DG increases income by DG/(1 - MPC) when investment is considered constant with respect to Y. What is the ratio 1/(1 - MPC) called?

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Definitions:

Four Humours

A historical medical theory postulating that health and temperament depend on the balance of blood, phlegm, yellow bile, and black bile in the body.

Psychological Abnormality

A condition characterized by thought, feeling, or behavior patterns considered outside societal norms, often leading to distress or impaired functioning.

Psychogenic Cause

A cause attributed to psychological factors rather than physiological origins.

Humours

In ancient and medieval physiology, it refers to the four bodily fluids (blood, phlegm, black bile, and yellow bile) thought to determine health and temperament.