Income-Expenditure 1

The Simple Multiplier Model--I

1. Suppose the economy runs according to this income-expenditure model:

Expected
Income Taxes Actual
Consumption Expected
Saving Investment Government
Spending

160 0 150 10 30 0

200 0 180 20 30 0

240 0 210 30 30 0

280 0 240 40 30 0

(a) If people expect disposable income to be 160, what will actual income be? $

(b) Will this be equilibrium?

(c) Where will actual disposable income equal expected disposable income? $

(d) The marginal propensity to consume is

(e) When income is 240, the average propensity to consume is

(f) The marginal propensity to save is .

(g) For equilibrium income to increase by $40, investment must increase by $.

(h) Therefore the multiplier is .

2. Normally the marginal propensity to consume should be between zero and one.

a) How would people act if their mpc was greater than one? Do you know anyone who acts that way?
b) Suppose the marginal propensity to consume were negative. What would this mean in terms of people's behavior?