In the simple Keynesian model which has no taxes and a saving function which is in the form S = -80 + .20Y, a $200 increase in desired investment leads to an increase in equilibrium income of
A) $40.
B) $100.
C) $400.
D) $1000.

Question

Quizplus · Accepted Answer

The marginal propensity to save (MPS) is 0.20, so the marginal propensity to consume (MPC) is 0.80. The multiplier is 1/(1-MPC) = 1/0.20 = 5. Therefore, a $200 increase in investment leads to a $200 * 5 = $1000 increase in equilibrium income.

In the Simple Keynesian Model Which Has No Taxes and a Saving