Question

Using the following aggregate expenditures table, answer the questions that follow.

Income (Y), in $	Consumption (C), in $	Saving (S), in $
2,200	2,320	−120
2,300	2,380	−80
2,400	2,440	−40
2,500	2,500	0
2,600	2,560	40
2,700	2,620	80
2,800	2,680	120
2,900	2,740	160
3,000	2,800	200

1. What does the simple Keynesian multiplier equal? What does it tell you?

2. If investment spending is equal to $120, what will be equilibrium income?

Answer 1

Answer a) Consumption function is of the form :

C= a+bY

where C= Consumption, a= autonomous consumption , b= Marginal propensity to consume, Y= Income

b= (C2-C1)/(Y2-Y1)

[ Taking any two values of C from the table and it's corresponding values of Y ]

Let C1=2320 , Y1= 2200, C2=2380, Y2=2300

b= (2380-2320)/(2300-2200)

b=60/100

b= 0.6

Marginal propensity to consume MPC=0.6

Keynesian multiplier = 1/(1-MPC)

Keynesian multiplier= 1/0.4 = 2.5

This means that with an increase in autonomous expenditure income will rise 2.5 times more than the actual Increase in expenditure.

Answer b) According to saving investment approach Equilibrium is at a point where Savings= Investment

At Investment= 120

Savings= Investment= 120 at income level Y=2800

Equilibrium income= 2800