Question

Which of the following statements is/are CORRECT under the Keynesian Cross (Fixed Price) Model?

• A. The product market and factor market independently determine the full-employment level of output.
• B. Output is determined in the product market by the aggregate expenditure.
• C. Money market determines the price level, given the quantity of money and the level of output.
• D. Employment is determined in the factor market by the output level determined in the product market.

Answer 1

The Correct Option is B, D

The question asks us to identify which statements are correct under the Keynesian Cross (Fixed Price) Model. Let's analyze each option in detail:

1. The product market and factor market independently determine the full-employment level of output: In the Keynesian model, the product and factor markets do not operate independently to determine full-employment output. Employment is demand-driven, and output is determined by aggregate demand levels. Thus, this statement is incorrect.
2. Output is determined in the product market by the aggregate expenditure: Under the Keynesian Cross Model, output is determined at the equilibrium where planned aggregate expenditure equals actual output. This means that the level of output is determined in the product market by the level of aggregate expenditure. Therefore, this statement is correct.
3. Money market determines the price level, given the quantity of money and the level of output: This statement pertains more to monetarist views or IS-LM analysis, where the money supply can impact the price level. However, the Keynesian Cross Model focuses on output levels relative to aggregate demand and does not directly address price levels or money markets. Consequently, this statement is incorrect in this context.
4. Employment is determined in the factor market by the output level determined in the product market: The Keynesian framework suggests that once output is determined through aggregate expenditure, the necessary level of employment follows to produce that output. Thus, employment is dependent on output levels determined by the product market, making this statement correct.

Conclusion: Based on the analysis above, the correct statements under the Keynesian Cross (Fixed Price) Model are:

• Output is determined in the product market by the aggregate expenditure.
• Employment is determined in the factor market by the output level determined in the product market.