Using the Keynesian cross model, which policy would likely have a larger immediate impact on increasing national income: direct cash transfers to low-income households (Policy A) o... Using the Keynesian cross model, which policy would likely have a larger immediate impact on increasing national income: direct cash transfers to low-income households (Policy A) or large-scale infrastructure projects (Policy B)?
Understand the Problem
The question asks you to compare the immediate impact of two government policies (cash transfers vs. infrastructure projects) on national income during a recession, using the Keynesian cross model. You need to identify which policy would likely have a larger multiplier effect and thus a greater immediate impact on increasing aggregate expenditure and national income.
Answer
Direct cash transfers to low-income households (Policy A) are likely to have a larger immediate impact on increasing national income compared to large-scale infrastructure projects (Policy B).
In the Keynesian cross model, direct cash transfers to low-income households (Policy A) are likely to have a larger immediate impact on increasing national income compared to large-scale infrastructure projects (Policy B). This is because low-income households have a higher marginal propensity to consume, leading to a quicker and more direct boost in aggregate demand.
Answer for screen readers
In the Keynesian cross model, direct cash transfers to low-income households (Policy A) are likely to have a larger immediate impact on increasing national income compared to large-scale infrastructure projects (Policy B). This is because low-income households have a higher marginal propensity to consume, leading to a quicker and more direct boost in aggregate demand.
More Information
The Keynesian cross model suggests that policies that quickly translate into increased spending have a more immediate impact on national income. Cash transfers tend to be spent rapidly, while infrastructure projects involve time lags.
Tips
A common mistake is overlooking the marginal propensity to consume. Lower-income households typically spend a larger portion of any additional income they receive, leading to a greater multiplier effect.
Sources
- 11.3 The Expenditure-Output or Keynesian Cross Model - texasgateway.org
- What Is Keynesian Economics? - Back to Basics - imf.org
- [PDF] Student Study Guide - bu.edu
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