Which of the following is most likely to reduce the size of the multiplier in the simple (2-sector) Keynesian model?
- Increased taxes on savings
- Reduced access to government funded medical care
- Reduced compulsory superannuation contributions for workers
- Increased competition in the banking sector, leading to lower borrowing costs
Answer given by the lecturer was 2. Could some please explain why? I thought that it was 3 (Employees have to save more of their earned income for retirement because firms no longer supplement super contributions for their workers, which increases the marginal propensity to save and decreases the multiplier.) How could it be 2 if we are in the two-sector Keynesian model? Doesn't that condition imply that there is no government spending to begin with as we are only considering the interaction between households and firms?