Consider the impact of an increase in thriftiness in the Keynesian-cross analysi

Question

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will: A) lower equilibrium income by the decrease in the intercept multiplied by the multiplier. B) lower equilibrium income by the decrease in the intercept. C) raise equilibrium income by the decrease in the intercept. D) raise equilibrium income by the decrease in the intercept multiplied by the multiplier.

Explanation / Answer

A.) Because the multiplier is reduced, the equilibrium income will decrease by the multiplier.

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