Consider the Income-Expenditure Identity in a Closed Economy,Y = C

Essay

Consider the income-expenditure identity in a closed economy,Y = C + I + G.Suppose consumption is always a fraction MPC of income,C = MPC×Y.
a. Show that income Y is equal to (I + G)/(1 - MPC).
b. Show that an increase in G by an amount DG increases income by DG/(1 - MPC) when investment is considered constant with respect to Y. What is the ratio 1/(1 - MPC) called?