If planned aggregate expenditure in an economy can be written as: PAE = 5000 + 0.8Y, what is the income-expenditure multiplier in this economy?
Y = 5000 + 0.8Y Y - 0.8Y = 5000 0.2Y = 5000 Y = 25000
Since the marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income.
25000 / 20000 = 1.25
Do I take this further using multiplier = 1 / (1 - MPC) = 1 / (1-1.25) = 4