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?

---

Definitions:

Preferred Shares

A type of stock that provides dividends to shareholders before common stockholders and may have preferential treatment in asset distribution upon liquidation.

Shareholder

An individual or entity that owns shares in a company, thus holding a portion of the company's equity and often having voting rights.

Sell Shares

This refers to the act of transferring ownership of stock or equity interests in a company from one party to another, typically in exchange for monetary compensation.

Circumstances

The conditions or facts affecting a situation, event, or action.