PEA 2023 PEA Q10 | ISI MSQE

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2023 PEA Q10

With saving rates unchanged but $\lambda$ rising (more income to workers), the new equilibrium has:

Reveal answer and solution

Answer

Solution

1
Again $S=\bar I$ , so $S$ unchanged. But
2
$Y^*=\frac{\bar I}{s_w\lambda+s_c(1-\lambda)}=\frac{\bar I}{s_c-(s_c-s_w)\lambda}.$
3
Since $s_c>s_w$ , $(s_c-s_w)>0$ . As $\lambda\uparrow$ , the denominator falls, so $Y^*\uparrow$ . So savings unchanged, income up.
4
Among the options, ``savings $\downarrow$ , income $\uparrow$ '' is closest, but actually $S$ is unchanged. The intended ISI answer is:

Answer structure / marking notes

Aggregate $S$ in level equals $\bar I$ (unchanged), but the average propensity to save $s_w\lambda+s_c(1-\lambda)$ falls; PEA treats this as ``savings decreases''.

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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.