The equilibrium income.
Answer to Problem 1QQ
Option ‘d’ is the correct answer.
Explanation of Solution
Option (d):
The increases in equilibrium income due to an increase in government purchase can be calculated as follows:
First, calculate the government spending multiplier.
Therefore, the value of government spending multiplier is 3.
Now, the increase in equilibrium income due to an increase in government purchase can be calculated as follows:
Therefore, the equilibrium income increases by $360 million.
Thus option (d) is correct.
Option (a):
The increases in equilibrium income due to an increase in government purchase can be calculated as follows:
First, calculate the government spending multiplier.
Therefore, the value of government spending multiplier is 3.
Now, the increase in equilibrium income due to an increase in government purchase can be calculated as follows:
Therefore, the equilibrium income increases by $360 million.
Thus option (a) is incorrect.
Option (b):
The increases in equilibrium income due to an increase in government purchase can be calculated as follows:
First, calculate the government spending multiplier.
Therefore, the value of government spending multiplier is 3.
Now, the increase in equilibrium income due to an increase in government purchase can be calculated as follows:
Therefore, the equilibrium income increases by $360 million.
Thus, option (b) is incorrect.
Option (c):
The increase in equilibrium income due to an increase in government purchase can be calculated as follows:
First, calculate the government spending multiplier.
Therefore, the value of government spending multiplier is 3.
Now, the increase in equilibrium income due to an increase in government purchase can be calculated as follows:
Therefore, the equilibrium income increases by $360 million.
Thus option (c) is incorrect.
Government spending multiplier: The government spending multiplier indicates the ratio of change in equilibrium income to the change in government spending.
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