Keynesian income-expenditure two-sector model

by | Jan 11, 2022 | Assignment

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.

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