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    Question

    Consider a Keynesian Cross Model with following

    features, Consumption Function: C= C0 + b (Y – T)   Tax Function: T = T0 + tY   Income Identity: Y = C + Io + Go Where, C = Consumption; Y = Real Income; T = Tax; I = Investment; G = Government Expenditure; b = Parameter; t = Tax Rate (The subscript 0 (zero) indicates that the concerned variable is autonomous) If b = 0.7 and t = 0.2, value of the Keynesian multiplier is_________?
    A 2.27 Correct Answer Incorrect Answer
    B 2.37 Correct Answer Incorrect Answer
    C 3.27 Correct Answer Incorrect Answer
    D 3.37 Correct Answer Incorrect Answer
    E None of these Correct Answer Incorrect Answer

    Solution

    Multiplier = 1/ (1-b+bt) = 1/(1-0.7+(0.7*0.2)) = 2.27

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