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No. 4 A simple Keynesian model has two groups of income earners. The
income of group 1 (Y1 ) is fixed at Rs. 800. Both groups have proportional
consumption function; the average propensity to consume is 0.8 for group
1 and 0.5 for group 2. Group 2 consumes only domestically produced
goods. However, group 1 consumes both domestically produced as well as
imported goods, their marginal propensity to import being 0.4. investment
goods are produced domestically and Investment (I) is autonomously
given at Rs. 600.
(i) Compute gross domestic product (Y)
(ii) Suppose group 2 makes an income transfer of Rs. 100 to
group 1. However, imports are restricted and cannot exceed
Rs. 250 (that is, import function ceases to be operative at
this value). How does Y change?
(iii) How does your answer to part (ii) change, if the upper
limit of imports is raised to Rs. 400?
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