Suppose policymakers decide to reduce the budget deficit by cutting government spending. Use the Keynesian Cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: (a) the axes, (b) the curves, (c) the initial equilibrium values, (d) the direction the curve shifts, and (e) the final equilibrium values. Explain in words what happens to equilibrium income as a result of the cut in government spending.

Consider the Keynesian Cross model. If the fiscal multiplier equals 2, and the government decides to increase government purchases by 100, by how much would equilibrium output increase?

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According to Keynes’ Law... A) The total demand for products determine the level of gross domestic product and may not equal the supply capacity of the economy in the short run. B) The total demand always equals the total supply capacity in the short run. C) The total demand tends to rise above the total supply capacity in the short run which leads to recessions D) The total supply of products determines the level of gross domestic product and the level of demand in the economy in the long run.

In the simple Keynesian model, evaluate the multiplier of public expenditures, the multiplier of taxes and the multiplier of transfer expenditures in terms of their effects. Why is the difference in effects caused? Explain.

Consider a 4-sector Keynesian model like that discussed in class with the following characteristics: exogenous consumption=2000, exogenous taxation=100, government spending=1000, exports=400, planned investment=400. The marginal propensity to save=20%, the marginal tax rate=20% and the marginal propensity to import=40%. The potential output for this economy is 6000. Note that import demand depends on disposable income. a) At its short run equilibrium, this economy is experiencing __________ (a contractionary/an expansionary) gap of __________ (round to 2 decimal places) b) Following the outbreak of a pandemic in the above economy, exogenous consumption falls to 1000 and the marginal propensity to save increases to 40%. In order for this economy to experience a zero output gap, government spending must ____________ (increase/decrease) by ____________ . Assume all other quantities remain unchanged

On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 billion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) 106 105 104 103 102 H AS 1ŏ1 101 ADA 100 AD 3 99 AD 2 98 AD1 97 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Billions of dollars) Equilibrium (?)

In the new Keynesian view, the larger the proportion of firms in the economy with sticky prices the less effective is fiscal policy in increasing output. The steeper the SRAS curve will be. the greater the increase in the price level for a given shift in the AD curve. the flatter the SRAS curve will be.

According to Keynesian economics, what impact would a balanced budget amendment to the constitution requiring the federal government to balance its budget annually have on the economy?

Consider the standard neoclassical growth model where there are two types of individuals: capitalists and workers. Capitalists own the initial wealth and do not work. Workers do not save. Technology is the standard neoclassical type. (a) Define a competitive equilibrium. (b) Use the first order conditions of the two different types of individuals in order to construct the appropriate implementability conditions. (c) Set up the Ramsey problem and characterize it. How would the standard optimal fiscal policy analysis change?