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Problem 1. Keynesian Cross The economy is described by the owing uctions: C Tz Tr 110+ 0.8YD 20 40 I= 70 G = 80 Nz = 30 • Q1. Express aggregate demand as a function of overall income Y. • Q2. Write down a condition that describes equilibrium in the Keynesian Cross diagram • Q3. Substitute all the information that you were given and find equilibrium output. • Q4. Find the multiplier associated with government purchases. • Q5. Suppose government purchases increase by 20. By how much would the equilibrium output increase? • Q6. Illustrate change in government purchases on the Keynesian Cross diagram. • Q7. Suppose transfers increase by 20. By how much would the equilibrium output increase?

Problem 1. Keynesian Cross The economy is described by the owing uctions: C Tz Tr 110+ 0.8YD 20 40 I= 70 G = 80 Nz = 30 • Q1. Express aggregate demand as a function of overall income Y. • Q2. Write down a condition that describes equilibrium in the Keynesian Cross diagram • Q3. Substitute all the information that you were given and find equilibrium output. • Q4. Find the multiplier associated with government purchases. • Q5. Suppose government purchases increase by 20. By how much would the equilibrium output increase? • Q6. Illustrate change in government purchases on the Keynesian Cross diagram. • Q7. Suppose transfers increase by 20. By how much would the equilibrium output increase?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Problem 1. Keynesian Cross: The economy is described by the following functions: C110+ 0.8YD Tr = 20 Tr= 40 I 70 G = 80 NI = 30 = Q1. Express aggregate demand as a function of overall income Y. • Q2. Write down a condition that describes equilibrium in the Keynesian Cross diagram • Q3. Substitute all the information that you were given and find equilibrium output. • Q4. Find the multiplier associated with government purchases. • Q5. Suppose government purchases increase by 20. By how much would the equilibrium output increase? • Q6. Illustrate change in government purchases on the Keynesian Cross diagram. • Q7. Suppose transfers increase by 20. By how much would the equilibrium output increase? Problem 2. Keynesian Cross with proportional taxation: The economy is described by the following functions: C Tz Tr C+cYD t-Y = Tr I = i G = G Nz = N₂ where t is the tax rate. Note the difference with the setup derived in class: here, the amount of taxes collected depends positively on the gross income. Q1. Express equilibrium output as function of other variables. • Q2. Find the multiplier associated with government purchases. How does this multiplier compare with that obtained in class (i.e. for a model with lump-sum taxes?) 1 • Q3. Come up with an intuitive explanation for why the multiplier is different. Problem 3. The IS Curve: The economy is described by the following functions: C = Tr = 15 Tx = 5 = 120+ 0.8YD I = 50-5i G = 80 Na 10 Q1. Derive the IS curve • Q2. Suppose taxes in the economy go up by 5, so the new value for tazes is 10. Derive the new IS curve • Q3. Illustrate the change in the (Y, i) coordinates Problem 4. Shifts in the IS Curve: How would the following shocks affect the position of the IS curve in the (Y, i) coordinates? Will the curve shift left or right? The shocks are: A. The government reduces expenditure on national defense B. Consumers become pessimistic about their future earnings and start consuming less C. A country the US trades with experiences a recession D. The government sends stimulus checks to households E. The government introduces a new capital investment subsidy program

# Problem 1. Keynesian Cross The economy is described by the following functions: \( C = 110 + 0.8Y_D \) \( T_x = 20 \) \( T_r = 40 \) \( I = 70 \) \( G = 80 \) \( Nx = 30 \) ### Questions: - **Q1.** Express aggregate demand as a function of overall income \( Y \). - **Q2.** Write down a condition that describes equilibrium in the Keynesian Cross diagram. - **Q3.** Substitute all the information given and find equilibrium output. - **Q4.** Find the multiplier associated with government purchases. - **Q5.** If government purchases increase by 20, by how much would equilibrium output increase? - **Q6.** Illustrate the change in government purchases on the Keynesian Cross diagram. - **Q7.** If transfers increase by 20, by how much would equilibrium output increase? --- # Problem 2. Keynesian Cross with Proportional Taxation The economy is described by the following functions: \( C = \overline{C} + c \cdot Y_D \) \( T_x = t \cdot Y \) \( T_r = \overline{T_r} \) \( I = \overline{I} \) \( G = \overline{G} \) \( Nx = \overline{Nx} \) where \( t \) is the tax rate. Note the difference with the setup derived in class: here, the amount of taxes collected depends positively on the gross income. ### Questions: - **Q1.** Express equilibrium output as a function of other variables. - **Q2.** Find the multiplier associated with government purchases. How does this multiplier compare with that obtained in class (i.e., for a model with lump-sum taxes)? - **Q3.** Come up with an intuitive explanation for why the multiplier is different. --- # Problem 3. The IS Curve The economy is described by the following functions: \( C = 120 + 0.8Y_D \) \( T_r = 15 \) \( T_x = 5 \) \( I = 50 - 5i \) \( G = 80 \) \( Nx = 10 \) ### Questions: - **Q1
Transcribed Image Text:# Problem 1. Keynesian Cross The economy is described by the following functions: \( C = 110 + 0.8Y_D \) \( T_x = 20 \) \( T_r = 40 \) \( I = 70 \) \( G = 80 \) \( Nx = 30 \) ### Questions: - **Q1.** Express aggregate demand as a function of overall income \( Y \). - **Q2.** Write down a condition that describes equilibrium in the Keynesian Cross diagram. - **Q3.** Substitute all the information given and find equilibrium output. - **Q4.** Find the multiplier associated with government purchases. - **Q5.** If government purchases increase by 20, by how much would equilibrium output increase? - **Q6.** Illustrate the change in government purchases on the Keynesian Cross diagram. - **Q7.** If transfers increase by 20, by how much would equilibrium output increase? --- # Problem 2. Keynesian Cross with Proportional Taxation The economy is described by the following functions: \( C = \overline{C} + c \cdot Y_D \) \( T_x = t \cdot Y \) \( T_r = \overline{T_r} \) \( I = \overline{I} \) \( G = \overline{G} \) \( Nx = \overline{Nx} \) where \( t \) is the tax rate. Note the difference with the setup derived in class: here, the amount of taxes collected depends positively on the gross income. ### Questions: - **Q1.** Express equilibrium output as a function of other variables. - **Q2.** Find the multiplier associated with government purchases. How does this multiplier compare with that obtained in class (i.e., for a model with lump-sum taxes)? - **Q3.** Come up with an intuitive explanation for why the multiplier is different. --- # Problem 3. The IS Curve The economy is described by the following functions: \( C = 120 + 0.8Y_D \) \( T_r = 15 \) \( T_x = 5 \) \( I = 50 - 5i \) \( G = 80 \) \( Nx = 10 \) ### Questions: - **Q1
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