DSE 2006 Question 24: Keynesian cross and the multiplier
Consider an economy which is demand constrained. The components of aggregate demand are: (i) Household Consumption; (ii) Government Investment Expenditure; and (iii) Private Investment. The government finances its expenditure by imposing a lump-sum tax on the households and always maintains a balanced budget. Households consume 1/2 of their disposable income. Private investment and government investment are complementary and related as follows: a unit investment by the government induces private investors to invest 2 units. Starting from an equilibrium situation, if the government raises its investment expenditure by 10 units, what will be the corresponding increase in the equilibrium level of income for this economy?
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Consider an economy which is demand constrained. The components of aggregate demand are: (i) Household Consumption; (ii) Government Investment Expenditure; and (iii) Private Investment. The government finances its expenditure by imposing a lump-sum tax on the households and always maintains a balanced budget. Households consume 1/2 of their disposable income. Private investment and government investment are complementary and related as follows: a unit investment by the government induces private investors to invest 2 units. Starting from an equilibrium situation, if the government raises its investment expenditure by 10 units, what will be the corresponding increase in the equilibrium level of income for this economy? (A) 20 units (B) 10 units (C) 50 units (D) income remains the same
Keynesian cross and the multiplier has come up 167 times in 7 exams since 2006.
What this question tests
This question is on The balanced budget multiplier, part of Keynesian cross and the multiplier in Macroeconomics.
Why raising spending and taxes by the same amount still raises income.
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