Keynesian Model and Equilibrium Aggregate Nominal Income

Explanation

The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-.8) = 5. Therefore the $20 billion increase in aggregate expenditures is magnified five times to $100 billion.

According to the Keynesian model, which is based on the ideas of economist John Maynard Keynes, changes in aggregate income are driven by changes in aggregate expenditures. The model suggests that when there is an increase in investment expenditures, it will have a multiplier effect on aggregate income.

The marginal propensity to consume (MPC) refers to the proportion of additional income that individuals choose to spend on consumption. In this case, the question states that the MPC is 0.80, meaning that for every additional dollar of income, individuals spend 80 cents and save 20 cents.

Now, let's analyze the impact of the independent increase in investment expenditures of $20 billion. Since investment expenditures are a component of aggregate expenditures, this increase will lead to a boost in aggregate income.

To calculate the increase in equilibrium aggregate nominal income, we can use the following formula:

ΔY = ΔI / (1 - MPC)

where: ΔY is the change in equilibrium aggregate nominal income, ΔI is the change in investment expenditures, and MPC is the marginal propensity to consume.

Plugging in the given values: ΔY = $20 billion / (1 - 0.80) = $20 billion / 0.20 = $100 billion

Therefore, the equilibrium aggregate nominal income will rise by $100 billion as a result of the $20 billion increase in investment expenditures.

The correct answer is C. $100 billion.