Macroeconomics (Book Only)
Macroeconomics (Book Only)
12th Edition
ISBN: 9781285738314
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 10, Problem 4WNG

(a)

To determine

According to Keynes, why the aggregate demand is insufficient to bring about the full employment output level.

(b)

To determine

Decrease in consumption is not matched by increase in investment.

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7. Deriving and exploring the total expenditures curve The following graph shows total production (TP) and the level of Natural Real GDP (NRGDP) for a hypothetical economy. When Real GDP is $325 billion, consumption is $275 billion, government purchases are $50 billion, and investment is $25 billion. When Real GDP is $375 billion, consumption is $300 billion, government purchases are $50 billion, and investment is $25 billion. Use the blue line (circle symbol) to plot the economy's total expenditure function within a simplified Keynesian framework. 450 425 X 400 375 TOTAL EXPENDITURE (Billions of dollars) 500 475 350 325 300 300 TP NRGDP 325 350 375 400 425 REAL GDP (Billions of dollars) 450 475 500 TE ?
10 . In the “complete Keynesian model”, the investment functions was I = I0 - f(i). An analyst now proposes the following investment function: I = I0 - f(i) + qY, where “q” is a parameter and Y is national income = GDP. Provide two different arguments, i.e. explanations as to why this investment function makes sense. The focus is on the new term, qY (q times Y), in the function.
What happens in the simple Keynesian model if households expect lower income in the future and decide to save more today? Adjust the graph and answer the question. Assume that investment varies directly with aggregate income. Aggregate expenditure (in billions of dollars) 10 9 8 7 5 4 3 2 1 0 0 1 2 3 4 5 6 7 Aggregate income (in billions of dollars) 8 9 AE = AI C+1 10
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