Suppose that following a boom in Mexico, US exports of sugar to Mexico rise by 400

Economics May 18, 2021

Suppose that following a boom in Mexico, US exports of sugar to Mexico rise by 400. Subsequently, we observe an increase in US sugar worker disposable income of 350; an increase in US tax revenues of 50; an increase in consumption spending by US sugar workers of 280; and an increase of saving by US sugar workers of 70.

The eventual increase in equilibrium output is

Group of answer choices

a) 1333.33

b) 571.43

c) 2285.71

d) 333.33

Expert Solution

Computation of the eventual increase in equilibrium output:-

MPC = 280/350

= 0.80

Tax rate = 50/400

= 12.5%

Multiplier = 1/(1-(1-Tax rate)*MPC)

= 1/(1-(1-12.5%)*0.80)

= 1/0.30

= 3.3333

Increase in equilibrium output = Output * Multiplier

= 400 * 3.3333

= 1,333.33

Hence, the correct option is a) 1,333.33

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