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AP Macroeconomics Page 1 of 7 Assignment: Apply Concepts of the Keynesian Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) 1. Contrast Say's law with Keynes's view of supply and demand in the macroeconomy. (5 points) 2. The AD / AS model is very useful in analyzing the macroeconomy. It’s so useful, in fact, that it can be used to compare and contrast two very different views of the economy and to describe situations in which one may be more valid than another. A. To start this process, explain and show in an AD / AS graph how the economy returns to the long-run, full-employment equilibrium level of output from the following levels: I. A level of output that is higher than the full-employment level (4 points) _____________ Copyright © 20 2 1 Apex Learning. See Terms of Use for further information.

AP Macroeconomics Page 2 of 7 Assignment: Apply Concepts of the Keynesian Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) II. A level of output that is lower than the full employment level (4 points) III. Are prices rigid or flexible in your answer to I and II? (4 points) B. The classical view of the economy holds that transitions to full employment are relatively quick. Under what condition(s) can an economy make a relatively quick and easy transition to full-employment level of output? (4 points) _____________ Copyright © 20 2 1 Apex Learning. See Terms of Use for further information.

AP Macroeconomics Page 3 of 7 Assignment: Apply Concepts of the Keynesian Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) C. The Keynesian view of the economy holds that transitions to full employment can be extremely slow. What condition(s) would keep an economy from moving back to full employment quickly and easily? (4 points) 3. The aggregate expenditure model is indicative of the Keynesian view of the economy because it inherently assumes that the level of output or income in the economy is determined by how much people want to purchase. A. Draw the standard AE diagram and show how equilibrium Y changes when autonomous expenditure rises by some amount. Y represents total income, or the value of aggregate production. (3 points) _____________ Copyright © 20 2 1 Apex Learning. See Terms of Use for further information.

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AP Macroeconomics Page 4 of 7 Assignment: Apply Concepts of the Keynesian Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) B. What is the relationship between MPC and MPS? Is the multiplier larger if MPS is smaller? (2 points) 4. Now, here’s an opportunity to show how to calculate equilibrium in the AE model and deal with some related issues. A. The economy starts out as: C = 1000 + 0.4 Y D , I = 200, G = 400, (X - M) = 0, T = 400. Find the value of equilibrium Y , the spending multiplier, and the tax multiplier . Hint: Y D = Y - T . (3 points) B. Then government spending increases by 100: C = 1000 + 0.4 Y D , I = 200, G = 500, (X - M) = 0, T = 400. How does Y change when G increases by 100? What is the new equilibrium value for Y ? Hint: Y D = Y - T . (3 points) _____________ Copyright © 20 2 1 Apex Learning. See Terms of Use for further information.

AP Macroeconomics Page 5 of 7 Assignment: Apply Concepts of the Keynesian Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) C. Or maybe taxes are cut by 100: C = 1000 + 0.4 Y D , I = 200, G = 400, (X - M) = 0, T = 300. How does Y change when T is cut by 100? What is the new equilibrium value for Y ? Hint: Y D = Y - T . (3 points) D. Which has a greater effect, raising government spending by 100 or cutting taxes by 100? (3 points) E. Another economy starts out as: C = 1000 + 0.8 Y D , I = 300, G = 200, (X - M) = -100, T = 300. Solve for equilibrium Y , the spending multiplier, and the tax multiplier. Hint: Y D = Y - T . (3 points) _____________ Copyright © 20 2 1 Apex Learning. See Terms of Use for further information.

AP Macroeconomics Page 6 of 7 Assignment: Apply Concepts of the Keynesian Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) F. Poor economic forecasts result in a decrease in investment: C = 1000 + 0.8 Y D , I = 150, G = 200, (X - M) = -100, T = 300. How does Y change when I decreases by 150? What is the new equilibrium value for Y ? Hint: Y D = Y - T. (3 points) 5. For each of the following, calculate the missing values. A. MPC = 0.75. Calculate the spending multiplier and the tax multiplier. (4 points) _____________ Copyright © 20 2 1 Apex Learning. See Terms of Use for further information.

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AP Macroeconomics Page 7 of 7 Assignment: Apply Concepts of the Keynesian Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) B. Spending multiplier = 2.5. Calculate the MPC and the tax multiplier. (4 points) C. Tax multiplier = 4.0. Calculate the MPC and the spending multiplier. (4 points) _____________ Copyright © 20 2 1 Apex Learning. See Terms of Use for further information.

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