Over the past 40 years interest rates in the developed world have fallen to very low levels. One argument for this is rising income inequality which has led to imbalances in savings and insufficient aggregate demand. Take the following Keynesian consumption functions for the "poor" (P) and “rich" (R) as given c = C+c°y°, (1) CR = Č +CRYR. (2) Suppose that C is the same for both poor and rich. Further suppose that c > c and define aggregate demand as the sum of CP and CR. Based on the above, could a rise in income inequality explain "insufficient demand"? Ex- plain.

Over the past 40 years interest rates in the developed world have fallen to very low levels. One argument for this is rising income inequality which has led to imbalances in savings and insufficient aggregate demand. Take the following Keynesian consumption functions for the "poor" (P) and “rich" (R) as given c = C+c°y°, (1) CR = Č +CRYR. (2) Suppose that C is the same for both poor and rich. Further suppose that c > c and define aggregate demand as the sum of CP and CR. Based on the above, could a rise in income inequality explain "insufficient demand"? Ex- plain.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter18: The Keynesian Model

Section: Chapter Questions

Problem 9SQP

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