Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:
A) lower equilibrium income by the decrease in the intercept multiplied by the multiplier.
B) lower equilibrium income by the decrease in the intercept.
C) raise equilibrium income by the decrease in the intercept.
D) raise equilibrium income by the decrease in the intercept multiplied by the multiplier.

Question

Quizplus · Accepted Answer

In the Keynesian-cross analysis, an increase in thriftiness, represented by a decrease in the intercept of the consumption function, means that at every level of income, consumption is lower and saving is higher. This decrease in consumption reduces aggregate demand, leading to a lower equilibrium income. The effect on equilibrium income is amplified by the multiplier, which is determined by the marginal propensity to consume (which remains unchanged in this scenario). Therefore, the equilibrium income is lowered by the decrease in the intercept multiplied by the multiplier.

Consider the Impact of an Increase in Thriftiness in the Keynesian-Cross