a) Explain the principle of consumption smoothing. Illustrate this concept with adiagram.b) Explain how borrowing constraints can impede the process of consumptionsmoothing. If many households are affected by such constraints, explain how this mayresult in a “Keynesian" consumption function.c) In a closed economy Keynesian Cross framework show the link between theconsumption function and the "multiplier".d) What assumptions are required to make the multiplier model relevant to the impact offiscal and monetary policy?

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a) Explain the principle of consumption smoothing. Illustrate this concept with a diagram.

MACROECONOMICS FOR TODAY

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ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter8: The Keynesian Model

Section: Chapter Questions

Problem 2SQP

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Question

a) Explain the principle of consumption smoothing. Illustrate this concept with a
diagram.
b) Explain how borrowing constraints can impede the process of consumption
smoothing. If many households are affected by such constraints, explain how this may
result in a “Keynesian" consumption function.
c) In a closed economy Keynesian Cross framework show the link between the
consumption function and the "multiplier".
d) What assumptions are required to make the multiplier model relevant to the impact of
fiscal and monetary policy?

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