In the Simple Keynesian Model with No Government and Foreign

question 241

Multiple Choice

In the simple Keynesian model with no government and foreign sectors,assume that the economy is in equilibrium at an output of $2 billion with a marginal propensity to consume of 0.9.If investment spending decreases by $0.05 billion,what is the new equilibrium output level?

• A) $1.95 billion
• B) $2.5 billion
• C) $1.9 billion
• D) $1.5 billion

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Definitions:

Consumption Sector

Part of the economy that involves the purchase of goods and services by individuals and households.

Real Interest Rate

The interest rate adjusted for inflation, reflecting the true cost of borrowing or the true yield on an investment.

Nominal Rate

The interest rate before adjustments for inflation, as opposed to the real rate, which is adjusted for the effects of inflation.

Expected Rate

The anticipated yield or return on an investment during a specific period, often estimated based on historical data and future projections.