(a) Recall the Keynesian cross discussed in File 5. Use this diagram to illustrate the effect of a decrease in G by 100

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A Recall The Keynesian Cross Discussed In File 5 Use This Diagram To Illustrate The Effect Of A Decrease In G By 100 1 (52.93 KiB) Viewed 41 times

(a) Recall the Keynesian cross discussed in File 5. Use this diagram to illustrate the effect of a decrease in G by 100 units on Y. Show that the change in Y is more than 100 units. Show also that the resulting change in Y depends on the marginal propensity to consume. (b) In our class discussion, we assume that real investment I does not depend on current output Y. (Recall the 4 factors behind I and they do not include Y.) Suppose now I depends positively on Y as well, which is quite acceptable as firms would invest more as income and output rise. How would such a new assumption affect the expenditure multiplier? Explain in words and illustrate in the diagram. (C) Suppose imports depend positively on income in the economy concerned, which agai should be quite reasonable. How would such an assumption affect the expenditure multiplier? Explain in words and illustrate in the diagram.