contestada

In the simple Keynesian model with no government and foreign sectors, assume that the economy is in equilibrium at an output of $2 billion with a marginal propensity to consume of 0.9. If investment spending decreases by $0.05 billion, what is the new equilibrium output level

Respuesta :

osondumartins

Options:

A. $1.95billion

B. $2.5 billion

C. $1.9 billion

D. $1.5 billion

Answer:D. $1.5billion

Explanation:

Keynesian economic model is an economic model that is built on expansionary economic policy, Keynesian economic model believes that the economy is moved by the impacts of Demand, the higher the demand the better the economic performance.

Multiplier = 1 / (1- marginal propensity to consume) = 1 / (1-0.9) = 1/ 0.1 = 10.

A reduction of $0.05 will be equal to ($0.05 billion*10) = $0.5 reduction in income.

THE EXPECTED NEW EQUILIBRIUM OUTPUT LEVEL WILL BE EQUAL TO THE EQUILIBRIUM OUTPUT-THE REDUCTION IN INCOME ($2 BILLION - $0.5 ) BILLION = $1.5 BILLION.