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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