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In the Keynesian model, exports...
remain unaffected by changes in output
Question text
The question is based on the information below:
If the Keynesian consumption function is C = 100 + 0.2 Y and disposable income is R
10 000, then:
The amount of total saving is
Y = C + S (income is consumed or saved)
C = a + bY (consumption is a function of income
S = Y – C (saving is what is left in income when part is consumed)
S = Y – [a + bY] (substitute a + bY for C)
S = Y – a - bY (expanding]
S = -a + Y(1-b) [factorising terms in Y
S = -100 + 0.8*10 000 (given a = 100; b = 0.2 and Y = 10 000)
R7 900
Question text
Which of the following is correct about an increase in interest rate in the Keynesian
model?
decrease investment
there is a negative relationship between investment and interest rates; interest is a cost of
borrowing (cost of capital) such that if interest rate is high the willingness to invest will be
low since it is expensive to invest or to borrow
Question text
Use a Keynesian model to calculate the answer.
Full employment output = 80 million
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Investment = 20 million
Autonomous consumption = 15 million
The marginal propensity to consume = 0,6
What will the equilibrium level of income be?
Equilibrium income is m*A
1 1 1 1
m is multiplier 1−𝑚𝑝𝑐 = 𝑚𝑝𝑠 = 0.4 = 1−0.6 = 2.5
A = sum of all autonomous components = ∑(I;C) = 20M+15M = 35million
EQ = 𝑚 ∗ 𝐴 = 2.5 × 35
87,5 million
Question text
A decrease in Investment spending will cause a/an
decrease in aggregate demand
𝐴𝐷 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
And there is direct relationship between AD and its components, suh that they increase
of decrease together
Question text
In the AD-AS model, the aggregate demand curve shows…
the relationship between the general price level and the level of total expenditure.
Question text
The appropriate demand management policy during a recession is ...
a decrease in tax rates.
Low taxes encourage spending through investing and consuming hence more activity
and more demand for goods and factors of production eg labour leading to higher
output and income hence exist from recession (a situation of low employment, low
activity, low output, low income)
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