An economy is characterised by the following equations: C = c0 + c1YD YD = Y-TI = b0 + b1Y Government spending (G) and taxes (T) are constant, while investment (1) is proportional to output (Y). Solve for the equilibrium output - Derive the Keynesian multiplier for G, and discuss how is the value of the - multiplier affected by the relationship between investment and output?

An economy is characterised by the following equations: C = c0 + c1YD YD = Y-TI = b0 + b1Y Government spending (G) and taxes (T) are constant, while investment (1) is proportional to output (Y). Solve for the equilibrium output - Derive the Keynesian multiplier for G, and discuss how is the value of the - multiplier affected by the relationship between investment and output?

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter18: The Keynesian Model

Section: Chapter Questions

Problem 9SQP

See similar textbooks

Similar questions

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
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.
Assume you're given the following information about the economy of Jasonia; C = 500+ 0.9YD | = 1000 T = 0.5Y X = 2000 %3! IM = 100 + 0.1Y G=1000 Calculate the equilibrium value of GDP based on the Keynes' Cross (Aggregate Expenditure) model. A BI 83 !
Which of the following statements about the Keynesian framework are accurate? a)Keynes posited a linear Consumption function C=Ca + mpcYd, where C is total desired consumption spending, Ca is consumption spending independent of income and Yd is disposable income and mpc is marginal propensity to consume b) In the C=Ca +mpcYd the Ca is the vertical axis intercept parameter, and mpc is the slope parameter. c) Keynes also posited that Investment spending was a function of expectations and the interest rate. d) In the Keynesian investment function the firm's estimated profitability of potential investment projects were determined by expectations of future sales and costs. e) Businesses would invest in those projects whose estimated profitability was greater than the market rate of interest. f) If the firms don't have the cash, they will borrow funds and earn the difference between the rate of return on the project and the lower market rate of interest. If they have more cash than needed…
Assume that the economy, as represented by the simple Keynesian model, is in equilibrium with income equal to $6 million and consumption spending equal to $5 million. Which of these is correct? O Investment is $1 million. There is no saving in this economy. The economy will go into disequilibrium because consumption is not equal to income. The information provided is insufficient to determine the level of investment spending.
Name four differences between the Keynes and Fishers model of consumption
The accompanying graph represents the Keynesian cross for a country, where the planned aggregate spending line (Planned AE) is graphed against a 45° line. Suppose that there is an autonomous decrease in aggregate spending of $40 billion in this country. a. Show this change on the graph (you can drag and shift the whole line or either of the endpoints) and answer the following two questions. b. What is the initial unplanned inventory investment? If the number is negative, be sure to include a negative sign. billion dollars c. After firms adjust their production, what is the total change in real GDP? If the number is negative, be sure to include a negative sign. following two questions. vay and answer the b. What is the initial unplanned inventory investment? If the number is negative, be sure to include a negative sign. billion dollars c. After firms adjust their production, what is the total change in real GDP? If the number is negative, be sure to include a negative sign. billion…
Consider an economy that is characterised by the following set of equations: C = co + C1YD Yp Y - T I bo + bịY %3D Government spending (G) and taxes (T) are constant. Note that investment () is proportional to output (Y). a) Solve for equilibrium output. b) Using your answer derived in (a) identify and discuss the multiplier. How does the relation between investment and output affect the value of the multiplier?
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
The multiplier in the Keynesian model equals:
b. Consider the following Keynesian Model: C= 50 + 0.4Yd T= 40 I=0.2Y X= 16 G= 30 M= 20 a. Using the equilibrium condition, solve for the value of the equilibrium output. b. What is the value of consumption? c. Write the savings function and use it to calculate the value of savings. d. What is the value of the multiplier? e. Is there a trade deficit or surplus? Give reasons for your answer.
If the Keynesian consumption function is C = 100 +0.75Y4 and there is no investment then, when disposable income is 500, what is the average propensity to consume? Round your answer to 2 decimal places e.g. 2.22