DSE 2006 Question 25: Keynesian cross and the multiplier
Consider an economy where 1/2 of the total income (output) is distributed to the workers and the other half to the capitalists. The capitalists save 50% of their income and consume the rest; the workers save 25% of their income and consume the rest. Aggregate demand consists of total consumption demand and total investment demand. Investment demand is autonomously given at 100 units. Output is demand determined. How does the equilibrium income value change if 3/4 of the total income is distributed to the workers and 1/4 to the capitalists?
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Consider an economy where 1/2 of the total income (output) is distributed to the workers and the other half to the capitalists. The capitalists save 50% of their income and consume the rest; the workers save 25% of their income and consume the rest. Aggregate demand consists of total consumption demand and total investment demand. Investment demand is autonomously given at 100 units. Output is demand determined. How does the equilibrium income value change if 3/4 of the total income is distributed to the workers and 1/4 to the capitalists? (A) equilibrium output increases by 160/3 units (B) equilibrium output increases by 100/3 units (C) equilibrium output increases by 800/3 units (D) equilibrium output does not change
Keynesian cross and the multiplier has come up 167 times in 7 exams since 2006.
What this question tests
This question is on Multiplier extensions: induced investment and class saving, part of Keynesian cross and the multiplier in Macroeconomics.
The multiplier when investment responds to income or when groups have different saving behaviour.
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