A Closer Look at Autonomous Expenditure and the Multiplier Effect

The Relationship Between Autonomous Expenditure and Equilibrium Expenditure

A $12 billion increase in autonomous expenditure increases equilibrium expenditure by $60 billion. This results from the multiplier effect, which plays a crucial role in determining the overall impact of changes in autonomous expenditure on the economy.

Understanding the Multiplier Effect

The multiplier is the factor by which a change in autonomous expenditure is multiplied to determine the resulting change in equilibrium expenditure. In this case, the multiplier is 5.00. The formula for calculating the multiplier is: Multiplier = 1 / (1 - MPC) where MPC represents the marginal propensity to consume. With an MPC of 0.8, the multiplier can be calculated as: Multiplier = 1 / (1 - 0.8) = 5.00

Implications of Autonomous Expenditure

Autonomous expenditure refers to spending that is not influenced by changes in disposable income. Examples include government spending, investment spending, and exports. By boosting autonomous expenditure, the economy can experience an increase in equilibrium expenditure, leading to economic growth and stability. For instance, a $12 billion increase in autonomous expenditure would result in a $60 billion increase in equilibrium expenditure, showcasing the significant impact of fiscal policies on the overall economy.

What is the relationship between a $12 billion increase in autonomous expenditure and equilibrium expenditure? What role does the multiplier play in this scenario?

In this scenario, a $12 billion increase in autonomous expenditure leads to a $60 billion increase in equilibrium expenditure. This relationship is facilitated by the multiplier effect, with a multiplier of 5.00 being applied to determine the overall impact on the economy.

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