Assuming that there is no government spending or trade, an economy’s aggregate demand is given by its domestic consumption (C) and investment (I), AD = C+ I= c_0+ c_{1}Y+ I. In the economy’s goods market equilibrium this equals its output: AD = Y. Solving for Y this yields: Y = [1/(1 - c_1)] (c_0 + I). Given this equation, which of the following statements is correct?

Question

Accepted Answer

The boost in the economy’s output is the same, regardless of whether the aggregate demand shock comes from an increase in investment Ior in autonomous consumption c_0.

Answer

The larger the marginal propensity to consume (c_1), the smaller the multiplier.

Answer

If c_1= 1/3, then a £1 million increase in investment would result in a £2 million increase in output, ceteris paribus.

Answer

The multiplier is given by 1 – c_1.

Crowdly

Assuming that there is no government spending or trade, an economy’s aggregate d...

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