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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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