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Homework answers / question archive / Suppose that following a boom in Mexico, US exports of sugar to Mexico rise by 400

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

Economics

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

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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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