DSE 2010 Question 28: Keynesian cross and the multiplier
Setup, from Q27 of the paper:
Consider a closed-economy Keynesian model: prices fixed, output determined by aggregate demand, investment fixed at I∗, no government. Two household groups A and B share total income Y as YA=λY and YB=(1−λ)Y, λ∈(0,1). Consumption is CA=c+cAYA and CB=c+cBYB with 0<cA<cB<1. The investment multiplier is
(Same two-group model.) If there is a one shot increase in the parameter λ,
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Setup, from Q27 of the paper: Consider a closed-economy Keynesian model: prices fixed, output determined by aggregate demand, investment fixed at I*, no government. Two household groups A and B share total income Y as Y^A=λ Y and Y^B=(1-λ)Y, λ∈(0,1). Consumption is C^A=c+c_AY^A and C^B=c+c_BY^B with 0<c_A<c_B<1. The investment multiplier is (Same two-group model.) If there is a one shot increase in the parameter λ, (A) equilibrium output unambiguously increases (B) equilibrium output unambiguously decreases (C) equilibrium output remains unchanged (D) equilibrium increases or decreases depending on whether λ≥ 1/2
Also written as: Setup, from Q27 of the paper: Consider a closed-economy Keynesian model: prices fixed, output determined by aggregate demand, investment fixed at I*, no government. Two household groups A and B share total income Y as Y^A=lambda Y and Y^B=(1-lambda)Y, lambda in (0,1). Consumption is C^A=c+c_AY^A and C^B=c+c_BY^B with 0<c_A<c_B<1. The investment multiplier is (Same two-group model.) If there is a one shot increase in the parameter lambda,
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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