JNU SSS 2011 Question 17: Keynesian cross and the multiplier
Let Y : aggregate real output per year, P : the price level, C : money value of aggregate consumption expenditure per year, I : money value of aggregate investment expenditure per year, L : aggregate employment (in labour hours per year), L∗ : total labour supply (in labour hours per year) and w : hourly money wage rate. Let W denote the money value of aggregate wage income per year and R the money value of aggregate non-wage income per year. Consider an economy in which labour is homogeneous, the aggregate productivity of labour (Y/L) is a constant a and the price level (when output is below its full employment level) is a factor m times the wage cost per unit of aggregate output. The price at full employment is always greater than or equal to that at below full employment. In equilibrium, PY=C+I.
If C=1000+0⋅8W+0⋅6R, w=10, m=34, a=16, L∗=2000, and output is below its full employment level, what is the increase in nominal income per unit increase in investment expenditure in the economy?
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Let Y: aggregate real output per year, P: the price level, C: money value of aggregate consumption expenditure per year, I: money value of aggregate investment expenditure per year, L: aggregate employment (in labour hours per year), L*: total labour supply (in labour hours per year) and w: hourly money wage rate. Let W denote the money value of aggregate wage income per year and R the money value of aggregate non-wage income per year. Consider an economy in which labour is homogeneous, the aggregate productivity of labour (Y/L) is a constant a and the price level (when output is below its full employment level) is a factor m times the wage cost per unit of aggregate output. The price at full employment is always greater than or equal to that at below full employment. In equilibrium, PY = C + I. If C = 1000 + 0· 8W + 0· 6R, w = 10, m = 4/3, a = 16, L* = 2000, and output is below its full employment level, what is the increase in nominal income per unit increase in investment expenditure in the economy? (A) 2 (B) 4 (C) 8 (D) 16
Also written as: Let Y: aggregate real output per year, P: the price level, C: money value of aggregate consumption expenditure per year, I: money value of aggregate investment expenditure per year, L: aggregate employment (in labour hours per year), L*: total labour supply (in labour hours per year) and w: hourly money wage rate. Let W denote the money value of aggregate wage income per year and R the money value of aggregate non-wage income per year. Consider an economy in which labour is homogeneous, the aggregate productivity of labour (Y/L) is a constant a and the price level (when output is below its full employment level) is a factor m times the wage cost per unit of aggregate output. The price at full employment is always greater than or equal to that at below full employment. In equilibrium, PY = C + I. If C = 1000 + 0* 8W + 0* 6R, w = 10, m = 4/3, a = 16, L* = 2000, and output is below its full employment level, what is the increase in nominal income per unit increase in investment expenditure in the economy?
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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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