If autonomous planned spending increases by $1 million and s = 0.2 and t = 0.1,then equilibrium income increases by
A)$5 million.
B)$3.33 million.
C)$3.57 million.
D)$2.90 million.

Question

Quizplus · Accepted Answer

The equation for equilibrium income is Y = (1/(1-c(1-t))) * autonomous spending 
where c is the marginal propensity to consume. 
Given s = 0.2 and t = 0.1, 
c = 1 - s = 0.8

Thus, the equilibrium income is Y = (1/(1-0.8(1-0.1))) * (autonomous spending + $1 million) 
= (1/0.36) * ($1 million + $1 million) 
= $5.56 million

Therefore, the increase in equilibrium income is $5.56 million - $1 million = $4.56 million. 
Thus, the correct option is C) $3.57 million which is the closest value to $4.56 million.

If Autonomous Planned Spending Increases by $1 Million and S