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4 marksBasic Keynesian Models

CAPE Economics Unit 2 · 2015 · Paper 2 · Question 2(b)(ii)

Consider the Keynesian consumption function: C = 2000 + 0.8(Y - T), where C = personal consumption, Y = personal income, T = income taxes, with Y = 40 000 and T = 0.25Y.

Calculate the multiplier and interpret its value.

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Other parts of this question

  1. 2(a)(i)Identify the most important determinant of consumer spending and personal saving.[1 mark]
  2. 2(a)(ii)a)Define marginal propensity to consume (MPC).[2 marks]
  3. 2(a)(ii)b)Define marginal propensity to save (MPS).[2 marks]
  4. 2(a)(iii)Describe the relationship between MPC and MPS.[2 marks]
  5. 2(b)(i)a)Calculate the average propensity to consume (APC).[2 marks]
  6. 2(b)(i)b)Calculate the average propensity to save (APS).[3 marks]
  7. 2(c)Distinguish between the 'investment demand curve' and the 'investment curve'.[4 marks]
  8. 2(d)(i)Using the accelerator model of investment, calculate the change in investment if firms desire to hold 25% of output as inventory and output falls by…[3 marks]
  9. 2(d)(ii)Calculate the change in investment if firms' desire to hold inventories rise to 30%, with all else remaining constant.[2 marks]

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