Economics For Today
10th Edition
ISBN: 9781337613040
Author: Tucker
Publisher: Cengage Learning
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Chapter 19, Problem 3SQP
To determine
Illustration of aggregate expenditure model.
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Students have asked these similar questions
The Aggregate Expenditure Model is traditionally called the” Keynesian Cross”. Use the Aggregate Expenditure Keynesian Cross diagram to show what happens to the economy under the following conditions: (Note that is different from the AS-AD Model.)
What happens in the model if government expenditures are increased (G↑)?
What happens if taxes are raised (T↑)?
What happens to the US economy if the rest of the world experiences economic growth and imports more US goods (X↑)?
Use the Keynesian cross model to predict the impact of an increase in government
purchases on equilibrium GDP. State the direction of the change and give a formula for
the size of the impact.
An increase in taxes shifts the planned expenditure function downward. The change in
income is given by
AY=
ΔΥ=
-MPC
1-MPC
An increase taxes shifts the planned expenditure function upward. The change in income is given
by
-MPC
1-MPC
AY=
XAT
An increase in taxes shifts the planned expenditure function inward. The change in income is given
by
AY=
1
1-MPC
XAT
1
1-MPC
The direction of the shift is undetermined without knowing the slope of the PE function. The
change in income is given by
XAT
XAT
Explain the effect of an increase in exports on the
equilibrium GDP in the Keynesian income-expenditure
model.
In your answer, carefully show the new equilibrium and
explain the adjustment to the new equilibrium.
Chapter 19 Solutions
Economics For Today
Ch. 19.4 - Prob. 1YTECh. 19 - Prob. 1SQPCh. 19 - Prob. 2SQPCh. 19 - Prob. 3SQPCh. 19 - Prob. 4SQPCh. 19 - Prob. 5SQPCh. 19 - Prob. 6SQPCh. 19 - Prob. 7SQPCh. 19 - Prob. 8SQPCh. 19 - Prob. 9SQP
Ch. 19 - Prob. 10SQPCh. 19 - Prob. 1SQCh. 19 - Prob. 2SQCh. 19 - Prob. 3SQCh. 19 - Prob. 4SQCh. 19 - Prob. 5SQCh. 19 - Prob. 6SQCh. 19 - Prob. 7SQCh. 19 - Prob. 8SQCh. 19 - Prob. 9SQCh. 19 - Prob. 10SQCh. 19 - Prob. 11SQCh. 19 - Prob. 12SQCh. 19 - Prob. 13SQCh. 19 - Prob. 14SQCh. 19 - Prob. 15SQCh. 19 - Prob. 16SQCh. 19 - Prob. 17SQCh. 19 - Prob. 18SQCh. 19 - Prob. 19SQCh. 19 - Prob. 20SQ
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- Consider an economy where the various components of expenditure follow these equations: C = 10 + 0.8Ya I = 500 %3D G = 100 X = 300 M = 0.1Y T = 0.1Y A) Calculate the equilibrium level of GDP in this economy, highlighting what are the values of the Keynesian multiplier and the autonomous components of expenditure. Now assume that aggregate investment is also sensitive to movements of the interest rate: I = 500 – 2,000r %3D The money supply is equal to 1,000 and money demand satisfies the following equation: Ma = 2Y – 8,000r B) Solve for the equilibrium levels of output and the interest rate. Explain why the equilibrium level of output is lower than the one obtained in (a). C) Suppose that the government increases the tax rate to 0.15. Calculate the equilibrium effects of this policy and provide an explanation with the help of appropriate diagrams. D) Now assume that the price level can adjust. Using appropriate diagrams, explain the short- run impact of the policy introduced in (v) on…arrow_forwardThe graph below shows a 45°-line (Keynesian cross) diagram. The economy is currently in macroeconomic equilibrium at output level Yo. Suppose that investment increases. 1) Use the line tool to show a possible position for the new aggregate expenditures line. Label this line AE2. Note: if you are not prompted for a label, you have used the wrong drawing tool. 2) Use the point drawing tool to show the new equilibrium levels of GDP and expenditures.Label this point 'B'. Real aggregate expenditures, AE Real GDP, Y Y = AE AE0 Qarrow_forwardQ3. 45° Z Y₁ Determine the effect of the following on the AD curve and equilibrium output Y. Draw the graph and indicate each change by showing the initial AD and Y and the corresponding changes. Explain each answer briefly in 2-3 sentences. a. The government increases its expenditure from G to G' such that G'> G. b. The marginal propensity to consume (MPC) increases, all other things remaining constant. AD AD₁ =C+I+G+NX the Plarrow_forward
- An increase in Government spending will cause GDP to rise by the ( increase in G ) x ( Multiplier ) true are false . according to the Keynesian Model , Equilibrium GDP can only occur at full time employment. True or false A recessionary gap is said to exist if current equilibrium GDP is greater than full employment GDP. True or falsearrow_forwardAnswer the following questions, which relate to the aggregate expenditures model:a. If Ca is $100, Ig is $50, Xn is -$10, and G is $30, what is the economy’s equilibrium GDP?b. If real GDP in an economy is currently $200, Ca is $100, Ig is $50, Xn is -$10, and G is $30, will the economy’s real GDP rise, fall, or stay the same?c. Suppose that full-employment (and full-capacity) output in an economy is $200. If Ca is $150, Ig is $50, Xn is -$10, and G is $30, what will be the macroeconomic result?arrow_forwardQUESTION 5 In the Keynesian model, the effect on equilibrium aggregate expenditure and output of an increase in Transfers (Tr) by an amount X is ________ the effect of a decrease in taxes (T) by the same amount. Choose the option that correctly fills the blank space in the statement above. a. Larger than b. Smaller than c. Equal to d. None of the abovearrow_forward
- Consider the Aggregate expenditure model. Where:AD = C + I + G + NX (1)where I, G, and NX are all autonomous.C = C + c∗(Y + T R − T A)(2)where T A = tY with t ∈ [0, 1] is the proportional tax rate and c∗ ∈ (0, 1) is themarginal propensity to consume.a. Using the information above, solve for AD. Combineall the autonomous terms into one term, A. b. In an (x, y) plane, where Y is on the horizontal axis and AD is on thevertical axis, illustrate the AD curve you derived above along with the 450line.Make sure to explain how you got the Y-intercept and solve for the slope c. Provide an economic interpretation for the slope of the AD function. d. Solve for the equilibrium level of output and show what happens to outputwhen G increases by 1 unit. That is, what is ∆Y ? Show your result graphicallyand explain how the AD curves shifts and by how much. Briefly explain.arrow_forwardFind equilibrium GDP using the following macroeconomic model (the numbers, with the exception of the MPC, represent billions of dollars): C = 1,250 + 0.80Y |= 1,250 G = 2,000 Consumption function Planned investment function Government spending function NX = - 500 Y= C +1+G+ NX Net export function Equilibrium condition The equilibrium level of GDP is $ billion. (Round your answer to the nearest billion dollarsarrow_forwardSuppose an economy had aggregate demand components with the following relationships: Consumption spending, C=140+.60*(DY) Investment spending,I=25+.15*Y Government Spending, G= 0 Net Export Spending,X=0 Tax collections, Tx=0 a. What is the equilibrium income for this economy? b. If the government decided to increase G spending by 6, what would be the new equilibrium income for this economy? c. If instead the government decided to reduce Tx (taxes) by 10, what would be the new equilibrium income for the economy? d. If instead the government decided to increase G spending and Increase Tx (taxes) by 20, what would be the new equilibrium for this economy?arrow_forward
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