In the Keynesian cross model, assume that the consumption function is given by: C = 100 + 0.7(Y – T) Planned investment is 300, government purchases and taxes are both 500 (initially a balanced budget) Carry all calculations to two decimal places. a. Graph “planned expenditure” as a function of income. b. What is equilibrium income?
In the Keynesian cross model, assume that the consumption function is given by:
C = 100 + 0.7(Y – T)
Planned investment is 300, government purchases and taxes are both 500 (initially a balanced
budget)
Carry all calculations to two decimal places.
a. Graph “planned expenditure” as a function of
income.
b. What is equilibrium income?
c. If government purchases increase to 550, what is the new equilibrium income? What
is the income multiplier for government purchases?
d. Based on your answer to the income multiplier in part c, what change in the level
of government purchases is needed to achieve a new, higher level of income of 2200 (taxes
unchanged at 500).
e. Based on the tax multiplier from question 2, what change in the level of taxes is
needed to achieve a new, higher level of income of 2200? (government purchases remain at
500)
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