The economy is described by the following functions: C = 110 + 0.8Y D Tx 20 Tr 40 I 70 G 80 %3D Nx 30 %3D • 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?

The economy is described by the following functions: C = 110 + 0.8Y D Tx 20 Tr 40 I 70 G 80 %3D Nx 30 %3D • 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?

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 5SQP

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In the Keynesian cross model, assume that the consumption function is given by C = 20 + 0.8(Y- T). Planned investment is 200; government purchases and taxes are both 400. There is no foreign trade. An economist has claimed that the full employment level of output is 2,400. How much should the government expenditure or taxes rise or fall to achieve full employment?
Recall the Keynesian Cross is the foundation to derive the IS curve. Suppose we have a simple closed economy. The cross of planned expenditure (PE) and the equilibrium condition (PE = Y) of this economy shows the equilibrium level of national output in the goods market. Here we assume the consumption (C) is a function of • C = 120 + 0.75(Y-T); Here the marginal propensity to consume (MPC) equals 0.75. Planned investment (I) is 200; government purchases (G) and taxes (T) are both 400. Use the conditions given, finish the following questions. (1) What is the equilibrium level of national income? Show step-by-step solution. Tip: recall the definition of planned expenditure (PE). At equilibrium, actual expenditure (Y) equals planned expenditure. (2) If government expenditures increase to 500, ceteris paribus (other things being equal), what is the new equilibrium income? What is the multiplier for government purchases? How much is the change of national income from the increase in…
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…
In the Keynesian cross model, assume that the consumption function is given by C = $220 + 0.7(Y – T) Planned investment is $50; government purchases and taxes are both $100. d. What level of government purchases is needed to achieve an income of $1080? Assume taxes remain at $100. G=$ e. What level of taxes is needed to achieve an income of $1080? Assume government purchases remain at S100.
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Use the Keynesian Model to answer this set of questions. Suppose that in the economy under consideration the consumption function can be written as C=200+.8(Y-T). Furthermore, you know that taxes are autonomous and equal to $10. Now, suppose that investment spending is equal to $50 at every level of disposable income and government spending is constant and equal to $100 at every level of disposable income, suppose that (X-M) is constant and equal to $20 at every level of disposable income. (a)Draw a graph of the consumption function with respect to disposable income. Measure/show consumption spending on the vertical axis and disposable income on the horizontal axis (b) Calculate equilibrium national income Y, from the information given. (c) From the information given above is the government running a deficit or surplus budget? Explain why. (d) Full employment output in this economy (Y) is equal to $2000 what do you predict is happening to inventories if the full employment level of…
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In the Keynesian cross model, assume that the consumption function is given by c= $220 + 0.7(Y – T) Planned investment is $50; government purchases and taxes are both SI00. c. If government purchases increase to $115, what is the new equilibrium income? What is the multiplier for government purchases? new Y=S multiplier:
Consider a closed economy where investment is constant and the marginal propensity to consume is 0.8. In that economy, the government decides to increase its expenditures. Why is the associated Keynesian multiplier greater than 1? Select one: a. Because the production increase leads to a revenue increase which leads to a demand increase which leads to a consumption increase which leads to further increases in production, demand and consumption b. Because the demand increase leads to a consumption increase which leads to a GDP increase which leads to a supply increase which leads to further increases in consumption, revenue and supply c. Because the demand increase leads to a supply increase which leads to a revenue increase which leads to a consumption increase which leads to further increases in demand, supply and GDP d. Because the production increase leads to a demand increase which leads to a supply increase which leads to a revenue increase which leads to further increases in…
Consider a closed economy with no government, where aggregate demand is determined by autonomous consumption, investment (which is independent of output), and the marginal propensity to consume. a) Given that autonomous consumption is 20, investment is also 20, and the marginal propensity to consume is 0.6, write out an equation for aggregate demand (AD) in this economy. b) Given this aggregate demand equation, and the equilibrium equation Y = AD, use algebra to find the equilibrium level of Y. (2 marks) c) Draw a diagram with output (Y) on the x-axis and aggregate demand (AD) on the yaxis. Draw two lines on this diagram: (i) Y = AD, and (ii) the aggregate demand function from part (a). Label the intercept of the AD line, and the point where the two lines intersect, with numerical values. d) Suppose that the marginal propensity to consume falls from 0.6 to 0.5. What would the new equilibrium level of Y be? Illustrate your answer in the diagram you drew for part (c). e)…
According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.75 and government expenditures increased by 100 while taxes are cut by 100, equilibrium income will rise by: Group of answer choices 0. 100. 200. 700.
The Simple Keynesian Model (i.e., the income-expenditure model). Assume: C = 150 + 0.9 DI I = 50 DI = C + I in equilibrium for a 2-sector model (Note: DI = C in a 1-sector model) Define the term, consumption. What is the value of “autonomous” consumption (also called “a” or the vertical intercept)? What is the value of the slope (also referred to as “b”) of the consumption function? There’s another name for the slope of the consumption function. What is it? What is the value of DI when the model is in equilibrium? What is the value of the “oversimplified” expenditure multiplier? If full-employment means that DI = $5000, then how much should autonomous consumption (or autonomous investment) increase to achieve full-employment? (Hint: Use the multiplier process formula.) Draw a graph of this 2-sector model. Indicate equilibrium DI, full-employment DI, as well as…