Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question

Transcribed Image Text:## Explaining Increased Government Spending During Recession Using Keynesian Theory
### Diagram 1: Interest Rate and Investment
- **Axes:**
- Vertical Axis: Interest Rate (R)
- Horizontal Axis: Investment (I)
- **Lines:**
- Downward-sloping black line: Relationship between interest rate and investment.
- Red line: Represents a change in investment (\(\Delta I\)) due to a change in interest rate.
- **Labels:**
- \(I_1\) and \(I_2\): Indicate different levels of investment.
- \(\Delta I\): The change in investment as a result of changes in the interest rate from \(I_1\) to \(I_2\).
### Diagram 2: Planned Expenditure and Output
- **Axes:**
- Vertical Axis: Planned Expenditure (PE)
- Horizontal Axis: Output (Y)
- **Lines:**
- Black line (PE1): Represents initial planned expenditure, \(PE_1 = C(Y-\overline{T}) + \overline{I}_1 + \overline{G}\).
- Red line (PE2): Represents new planned expenditure with decreased investment, \(PE_2 = C(Y-\overline{T}) + \overline{I}_2 + \overline{G}\).
- **Labels:**
- \(\Delta I\): Change in investment.
- \(\Delta Y\): Resulting change in output.
### Diagram 3: Government Spending
- **Axes:**
- Vertical Axis: Planned Expenditure (PE)
- Horizontal Axis: Output (Y)
- **Lines:**
- Black line (PE1): Initial planned expenditure, \(PE_1 = C(Y-\overline{T}) + I_1 + \overline{G}_1\).
- Red line (PE2): New planned expenditure with reduced investment, \(PE_2 = C(Y-\overline{T}) + I_2 + \overline{G}_1\).
- Blue line (PE3): Further increased planned expenditure with increased government spending, \(PE_3 = C(Y-\overline{T}) + I_2 + \overline{G}_2\).
- **Labels:**
- \(\Delta G\): Change in government spending.
- \(\Delta
Expert Solution

Step 1
The Keynesian economics would result in the demand side economics which determines the equilibrium price and the output. The Keynesian economics would result in short run macroeconomics which was one of the most effective policy to counter recession.
The Keynesian policies are the fiscal policy which includes tax and the government expenditure which affects the output. The fiscal policy increases the aggregate demand which increases the output and the price level.
Step by step
Solved in 2 steps

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON

Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning

Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning

Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education