Explain the Keynesian Consumption Function and the Money Multiplier

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Explain this using a two period inter-temporal model of consumption


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Answer all questions in Section A . Answer one question from Section B

Section A (answer all questions)

1. Explain the following concepts:

a. The Keynesian Consumption Function

b. The Money Multiplier

c. The Marshall-Lerner Condition


2. Comment on the following statement:

‘An input price shock to producers will cause a shift in the IS curve and a shift in the AD curve resulting in lower output in both the short-run and the long-run.


3. Comment on the following statement:

‘If the demand for real money balances is only a function of output (i.e. there is only a transactions motive and not an asset motive in the liquidity demand function) and investment is a function of the interest rate, then there will be no paradox of thrift even in the Keynesian short-run.’


4. Comment on the following statement:

‘In an open economy with a fixed exchange rate and perfectly immobile capital (zero capital mobility) there will be no way for the Central Bank to increase output.’


Section B (answer ONE of question 5 or question 6)

5. ‘If we allow consumers to smooth consumption over time by borrowing and saving and consuming from wealth then we should expect less volatility in consumption assuming credit markets work fairly well.’ Explain this using a two period inter-temporal model of consumption.


6. ‘An increase in saving will typically increase consumption per worker in the long-run by increasing the capital stock but a situation could also occur where an increase in saving will actually reduce the level of consumption per worker even in the long-run.’ Explain this using the Neo-classical growth model.



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