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Questions › DSE › DSE 2013 › Q51
2 marksMacroeconomics › Keynesian cross and the multiplier › The open-economy multiplierModerateabout 2 min

DSE 2013 Question 51: Keynesian cross and the multiplier

Consider an open economy simple Keynesian model with autonomous investment III. People save a constant proportion sss of disposable income and consume the rest. Government taxes total income at a constant rate τ\tauτ and spends an exogenous amount GGG. Exports XXX are autonomous at the fixed real exchange rate (normalized to unity). Imports MMM are a linear function of total income with constant import propensity mmm. Let I=3200I=3200I=3200, G=4000G=4000G=4000, X=800X=800X=800, s=12s=\tfrac12s=21​, τ=25\tau=\tfrac25τ=52​, and m=110m=\tfrac1{10}m=101​.

The equilibrium level of income is given by:

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Consider an open economy simple Keynesian model with autonomous investment I. People save a constant proportion s of disposable income and consume the rest. Government taxes total income at a constant rate τ and spends an exogenous amount G. Exports X are autonomous at the fixed real exchange rate (normalized to unity). Imports M are a linear function of total income with constant import propensity m. Let I=3200, G=4000, X=800, s=1/2, τ=2/5, and m=1/10. The equilibrium level of income is given by: (A) 8,000 (B) 16,000 (C) 10,000 (D) None of the above

Also written as: Consider an open economy simple Keynesian model with autonomous investment I. People save a constant proportion s of disposable income and consume the rest. Government taxes total income at a constant rate tau and spends an exogenous amount G. Exports X are autonomous at the fixed real exchange rate (normalized to unity). Imports M are a linear function of total income with constant import propensity m. Let I=3200, G=4000, X=800, s=1/2, tau=2/5, and m=1/10. The equilibrium level of income is given by:

Keynesian cross and the multiplier has come up 167 times in 7 exams since 2006.

What this question tests

This question is on The open-economy multiplier, part of Keynesian cross and the multiplier in Macroeconomics.

How imports leak spending abroad and shrink the multiplier.

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