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PEAMCQModerate

2023 PEA Q9

Demand-determined output. Workers receive share λY\lambda Y, capitalists (1−λ)Y(1-\lambda)Y. Saving rates sws_w (workers) and scs_c (capitalists), with sw<scs_w<s_c. Investment Iˉ\bar I autonomous. If both scs_c and sws_w rise, in the new equilibrium:

Reveal answer and solution

Answer

D

Solution

  1. 1

    Equilibrium: S=IˉS=\bar I. Aggregate savings:

  2. 2
    S=[swλ+sc(1−λ)]Y=Iˉ  ⟹  Y∗=Iˉswλ+sc(1−λ). S=[s_w\lambda+s_c(1-\lambda)]Y=\bar I \;\Longrightarrow\; Y^*=\frac{\bar I}{s_w\lambda+s_c(1-\lambda)}.
  3. 3

    If sw,scs_w,s_c both increase, the denominator rises, so Y∗Y^* falls. Aggregate savings S=IˉS=\bar I is unchanged (paradox of thrift in the Kaldor framework).

Answer structure / marking notes

S=IˉS=\bar I pins down savings independent of ss; only YY adjusts.

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Content note

Imported from public/resources/isi/msqe/solutions/pea/2023/ISI_MSQE_PEA_2023_Solutions.tex. Question wording is retained from the available local TeX source; incomplete option blocks or ambiguous source status are flagged for review.