## 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

Answered: Interest Rate R Investment

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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## 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.

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