Understanding the Impact of Autonomous Expenditure on Equilibrium Expenditure

An economy has no imports and no taxes. The marginal propensity to save is 0.8

A $48 billion increase in autonomous expenditure increases equilibrium expenditure by $60 billion. The multiplier is 1.25.

In an economy with no imports and no taxes, the multiplier is equal to 1/(1-MPC), where MPC is the marginal propensity to consume. Since the question states that the marginal propensity to save is 0.8, the MPC is 0.2, and thus the multiplier is:

Multiplier = 1/(1-0.2) = 1.25

An increase in autonomous expenditure (AE) increases equilibrium expenditure by a multiple of the increase in AE equal to the multiplier. Using the multiplier of 1.25 and the fact that the increase in AE is $60 billion, the increase in equilibrium expenditure is:

Equilibrium Expenditure = $60 billion x 1.25 = $48 billion

Therefore, the correct answer is Option A: $48 billion; 1.25.

What is the impact of autonomous expenditure on equilibrium expenditure in an economy with no imports and no taxes?

A $48 billion increase in autonomous expenditure increases equilibrium expenditure by $60 billion. The multiplier in this economy is 1.25, which is calculated based on the marginal propensity to consume (MPC) of 0.2. The multiplier formula is 1/(1-MPC) in this scenario.