The marginal propensity to expend is .66 and autonomous expenditures have just fallen by 20. a.

Step 1: Understand the concept of Marginal Propensity to Expend (MPE)u000AThe marginal propensity to

The marginal propensity to expend is .66 and autonomous...

Key Concepts

Marginal Propensity to Expend

The marginal propensity to expend is the fraction of an additional unit of income that is spent on consumption or other expenditures rather than saved. It is a critical concept in the analysis of the multiplier effect in macroeconomics, as it determines the extent to which initial changes in spending will translate into larger changes in overall economic activity.

Autonomous Expenditures

Autonomous expenditures refer to the components of total spending in an economy that do not vary with the level of income. These expenditures are independent of current income levels and include elements such as government spending, investment, or any other baseline expenditures. Changes in autonomous expenditures directly affect the equilibrium income in the economy.

Multiplier Effect

The multiplier effect describes how an initial change in autonomous spending, such as a decrease or increase, leads to a magnified change in equilibrium income. The multiplier is calculated as one divided by one minus the marginal propensity to expend, indicating that even a small change in autonomous expenditures can have a large impact on total economic output.

Equilibrium Income

Equilibrium income is the level of income at which aggregate spending equals aggregate output. In macroeconomic models, especially the Keynesian framework, changes in autonomous expenditures, combined with a given marginal propensity to expend, shift the aggregate expenditure schedule, thereby leading to a new equilibrium income through the multiplier process.

The marginal propensity to expend is .66 and autonomous expenditures have just fallen by $$\$ 20$$. a. What will likely happen to equilibrium income? b. Demonstrate graphically. LO3

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