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Questions › JNU › JNU SSS 2017 › Q41
5 marksMacroeconomics › Keynesian cross and the multiplier › Multiplier extensions: induced investment and class savingHardabout 7 min

JNU SSS 2017 Question 41: Keynesian cross and the multiplier

Consider a closed economy without government spending or taxes. The equilibrium value of output in each period is determined by the equality of (the value of) output and expenditure. Saving in period ttt is given by S(t)=s⋅Y(t)S(t) = s \cdot Y(t)S(t)=s⋅Y(t) and investment expenditure in period t+1t + 1t+1 is given by I(t+1)=a+b⋅Y(t)I(t + 1) = a + b \cdot Y(t)I(t+1)=a+b⋅Y(t), for all values of ttt. aaa is a positive constant, sss and bbb are positive constants less than unity and Y(t)Y(t)Y(t) is the value of output in period ttt. What relation must hold between the values of sss and bbb for there to exist a value of output in this economy, which once achieved in a time period will continue to persist in subsequent periods of time?

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Plain-text version

Consider a closed economy without government spending or taxes. The equilibrium value of output in each period is determined by the equality of (the value of) output and expenditure. Saving in period t is given by S(t) = s · Y(t) and investment expenditure in period t + 1 is given by I(t + 1) = a + b · Y(t), for all values of t. a is a positive constant, s and b are positive constants less than unity and Y(t) is the value of output in period t. What relation must hold between the values of s and b for there to exist a value of output in this economy, which once achieved in a time period will continue to persist in subsequent periods of time?

Also written as: Consider a closed economy without government spending or taxes. The equilibrium value of output in each period is determined by the equality of (the value of) output and expenditure. Saving in period t is given by S(t) = s * Y(t) and investment expenditure in period t + 1 is given by I(t + 1) = a + b * Y(t), for all values of t. a is a positive constant, s and b are positive constants less than unity and Y(t) is the value of output in period t. What relation must hold between the values of s and b for there to exist a value of output in this economy, which once achieved in a time period will continue to persist in subsequent periods of time?

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.

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