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13 January, 15:20

A. In an AE model with MPC = 0.80, the government increases spending by $100 million. What will be the increase in equilibrium Y in the Keynesian AE model?

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  1. 13 January, 16:44
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    increase in equilibrium Y in the Keynesian AE model = 500

    Explanation:

    Formula AE Model = ΔY = 1/1-C * ΔG

    Where ΔY = Change in National Income

    Marginal Propensity to Consume = 0.80

    Change in government spending = 100

    ΔY = 1/1-0.8*100 = 1/0.2*100 = 5*100 = 500
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