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