question archive The Keynesian model is for an open economy with a government sector

The Keynesian model is for an open economy with a government sector

Subject:EconomicsPrice:9.82 Bought3

The Keynesian model is for an open economy with a government sector. 

4.4 Explain the marginal propensity to consume for this model by incorporating the provided information in your answer. (2) 
4.5 Calculate the multiplier for this economy (3)                    

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

See explanation.

Step-by-step explanation

Aggregate consumption C is shown as:

 

C = Co + cYd, where

Co is autonomous consumption,

Yd is disposable income which is Y -Taxes

c is the marginal propensity to consume

 

The C function, is therefore, composed of two components---

autonomous ( not related to income) and induced ( related to income).

C increases as domestic income rises and falls if Y declines.

 

The marginal propensity to consume  in  graph, is shown by the slope of C function.

 

MPC = Change in consumption/Change in disposable income

MPS = marginal propensity to save = 1-MPC.

 

The expenditures multiplier = 1/(1-MPC).

Thus, if MPC = 0.75, multiplier = 1/(1-0.75) = 1/0.25 = 4.

That means that any expenditure like in I or G will create 4 of income or Y.

Higher the MPC, the bigger the multiplier.