Which of the following statements is/are CORRECT under the Keynesian Cross (Fixed Price) Model?
Select all that apply.
2 marksMacroeconomicsKeynesian cross and the multiplierKeynesian cross equilibriumModerateabout 2 min
IIT JAM 2022 Question 37: Keynesian cross and the multiplier
Answer and worked solution
Answer: (B) and (D)
In the fixed-price Keynesian cross, output is demand-determined: aggregate expenditure sets the equilibrium output in the product market, which is statement (B). Employment is then whatever is needed to produce that output, determined in the factor market by the product-market outcome, which is statement (D).
Statement (A) is wrong because output is not set at full employment independently by the two markets, and (C) is wrong because with a fixed price the money market determines the interest rate, not the price level. The correct statements are (B) and (D).
The trap: (A) The product market and factor market independently determine the full-employment level of output.
The Keynesian cross is demand-driven, so output need not equal the full-employment level; statement (A) imports a Classical conclusion.
Keynesian cross and the multiplier has come up 167 times in 7 exams since 2006.
What this question tests
This question is on Keynesian cross equilibrium, part of Keynesian cross and the multiplier in Macroeconomics.
How income is determined when output adjusts to planned spending, and what happens to unplanned inventories.
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