Using the simple Keynesian model with a consumption function of C = 200 + .9Y, an $10 change in desired investment leads to a change in equilibrium income of
A) $10.
B) $100.
C) $20.
D) $90.

Question

Quizplus · Accepted Answer

In the simple Keynesian model, the multiplier is given by 1/(1 - MPC), where MPC is the marginal propensity to consume. Here, MPC = 0.9, so the multiplier is 1/(1 - 0.9) = 10. A $10 change in investment leads to a $10 * 10 = $100 change in equilibrium income.

Using the Simple Keynesian Model with a Consumption Function of C