Assume the following Keynesian income-expenditure two-sector model: AD = Cp + Ip Cp = Co + c .Y Ip = Iowhere AD is aggregate demand; Cp is planned consumption; Ip is planned investment; Co is exogenous consumption; c is the marginal propensity to consume; Y is the level of income (and output); and Io is exogenous investment.(a) What is the relationship between the marginal propensity to consume and the average propensity to consume? (b) What is equilibrium Y in terms of Co, c and Io?(c) Derive the multiplier for a change in Io.(d) What does this model assume about aggregate supply and the general price level?(e) Represent this model in a 45? cross-diagram and illustrate the equilibrium level of income.
Keynesian income-expenditure two-sector model
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