1 markMacroeconomicsKeynesian cross and the multiplierGovernment spending and tax multipliersModerateabout 2 min

IIT JAM 2022 Question 46: Keynesian cross and the multiplier

With $C = C_0 + b(Y - T)$ , $T = T_0 + tY$ , $Y = C + I_0 + G_0$ , $b = 0.75$ and $t = 0.1$ , an increase in $G_0$ by Rs. 20 million will increase $Y$ by Rs. _______ million (round off to 2 decimal places).

Answer and worked solution

Answer: 61.52 to 61.56

With an income tax the government-expenditure multiplier is $\dfrac{1}{1 - b(1 - t)}$ .

Here $b(1-t) = 0.75\times0.9 = 0.675$ , so the multiplier is $\dfrac{1}{0.325} = 3.0769$ , and $\Delta Y = 3.0769\times20 = 61.54$ million, within the accepted range. The answer is about $61.54$ .

Plain-text version

With C = C₀ + b(Y - T), T = T₀ + tY, Y = C + I₀ + G₀, b = 0.75 and t = 0.1, an increase in G₀ by Rs. 20 million will increase Y by Rs. _ million (round off to 2 decimal places).

Also written as: With C = C_0 + b(Y - T), T = T_0 + tY, Y = C + I_0 + G_0, b = 0.75 and t = 0.1, an increase in G_0 by Rs. 20 million will increase Y by Rs. _ million (round off to 2 decimal places).

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

What this question tests

This question is on Government spending and tax multipliers, part of Keynesian cross and the multiplier in Macroeconomics.

The effect on income of changes in government spending, lump-sum taxes, transfers and income taxes.

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