This question asks us to identify the correct saving function based on a given value for the Keynesian investment multiplier. Let's break down the steps to find the relationship.
Understanding the Keynesian Multiplier
The Keynesian investment multiplier, often denoted by '$k$', quantifies the change in national income resulting from an initial change in autonomous spending (like investment). It is directly related to the Marginal Propensity to Consume (MPC).
The formula for the multiplier is:
$$k = \frac{1}{1 - MPC}$$We are given that the value of the multiplier ($k$) is 4.
Calculating the Marginal Propensity to Consume (MPC)
Using the multiplier formula, we can find the MPC:
- Start with the multiplier formula: $k = \frac{1}{1 - MPC}$
- Substitute the given multiplier value: $4 = \frac{1}{1 - MPC}$
- Rearrange the formula to solve for $MPC$:
- $1 - MPC = \frac{1}{4}$
- $1 - MPC = 0.25$
- $MPC = 1 - 0.25$
- $MPC = 0.75$
So, the Marginal Propensity to Consume is 0.75.
Calculating the Marginal Propensity to Save (MPS)
In Keynesian economics, the sum of the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS) is always equal to 1. This means that any portion of disposable income that is not consumed is saved.
The relationship is:
$$MPC + MPS = 1$$Now, we can calculate the MPS using the MPC we found:
- Substitute the MPC value: $0.75 + MPS = 1$
- Solve for MPS: $MPS = 1 - 0.75$
- $MPS = 0.25$
The Marginal Propensity to Save is 0.25.
Determining the Saving Function
The saving function ($S$) describes how saving relates to disposable income ($Y_D$). It is generally expressed in the form:
$$S = -a + MPS \cdot Y_D$$Where:
- $S$ is saving
- $-a$ represents autonomous saving (the negative of autonomous consumption, which occurs when $Y_D = 0$)
- $MPS$ is the Marginal Propensity to Save
- $Y_D$ is disposable income
We have calculated the $MPS$ to be 0.25. Now we need to find the option where the saving function has $MPS = 0.25$.
Let's examine the given options:
| Option | Saving Function | MPS |
|---|---|---|
| 1 | $S = -4 + 0.4Y_D$ | 0.4 |
| 2 | $S = -10 + 0.75Y_D$ | 0.75 |
| 3 | $S = -12 + 0.25Y_D$ | 0.25 |
| 4 | $S = 6 + 0.35Y_D$ | 0.35 |
Comparing our calculated $MPS$ (0.25) with the $MPS$ values in the options, we find that Option 3 matches.
The saving function $S = -12 + 0.25Y_D$ correctly corresponds to a Keynesian investment multiplier of 4.
Important Questions from Macroeconomics
- Real-factor demand-pull inflection can be caused by:
A. Increase in investment
B. Decrease in consumer demand
C. Decrease in imports given the exports
D. Decrease in exports given the imports
E. Decrease in government expenditure without change in tax revenue.
Choose the correct answer from the options given below : Match List-I with List-II:
List-I (Concepts) List-II (Given by) A. Paradox of thrift I. K. Boulding B. Water-Diamond paradox II. A.C. Pigou C. Wage employment paradox III. J.M. Keynes D. Macroeconomic paradox IV. Adam Smith
Choose the correct answer from the options given below:- Which of the followings are the effects of increase in government spending in IS-LM framework in a closed economy?
A. Increase in income by multiplier times government expenditure.
B. Shift in IS curve to the right leading to disequilibrium in money market at given level of interest rate.
C. Quantity of money demand will be higher.
D. Interest rate will decrease.
Ε. Private investment will increase leading to increase in aggregate demand.
Choose the correct answer from the options given below : - If the marginal propensity to consume is 0.8 and initial increase in tax revenues by the government is Rs. 100, then the impact on national income would be:
- Which of the followings are true about New Classical approach.
A. The main protagonist was R.E. Lucas Jr.
B. It is based on adaptive expectation.
C. It was developed during 1950s.
D. Complete wage and price flexibility.
Ε. Difference between actual and expected price is a random error.
Choose the most appropriate answer from the options given below :
