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Questions › DSE › DSE 2010 › Q29
2 marksMacroeconomics › Keynesian cross and the multiplier › Multiplier extensions: induced investment and class savingModerateabout 3 min

DSE 2010 Question 29: 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∗I^{*}I∗, no government. Two household groups AAA and BBB share total income YYY as YA=λYY^{A}=\lambda YYA=λY and YB=(1−λ)YY^{B}=(1-\lambda)YYB=(1−λ)Y, λ∈(0,1)\lambda\in(0,1)λ∈(0,1). Consumption is CA=c+cAYAC^{A}=c+c_{A}Y^{A}CA=c+cA​YA and CB=c+cBYBC^{B}=c+c_{B}Y^{B}CB=c+cB​YB with 0<cA<cB<10<c_{A}<c_{B}<10<cA​<cB​<1. The investment multiplier is

(Same two-group model.) If there is a one shot increase in the parameter cAc_{A}cA​,

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Plain-text version

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 c_A, (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 c_A,

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.

TestStop has 19 past-paper questions on this subtopic.

Practise Keynesian cross and the multiplierMore on Multiplier extensions: induced investment and class saving

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Question from the DSE 2010 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.