Answer to Question #154470 in Macroeconomics for prasad weerasinghe

Question

In the simple Keynesian model, an increase of one dollar in autonomous expenditure will  cause equilibrium income to increase by a multiple of this one dollar increase. Explain the  process by which this happens using different approached of explanations..

Answer 1

An increase in one dollar for autonomous expenditure is directly proportional to the increase in income as depicted by both the aggregate expenditure curve and a 45 degrees curve. One dollar increase in autonomous expenditure will result in an equivalent increase in income by one dollar shifting the equilibrium Expenditure to the right supposed the marginal propensity to consume is 1.