EBK PRINCIPLES OF MACROECONOMICS
6th Edition
ISBN: 9780073534701
Author: Frank
Publisher: YUZU
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Chapter 11, Problem 11.2CC
To determine
Explain graphically the determination of short-run equilibrium output for the economy.
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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…
Which equation represents the macroeconomic equilibrium condition in the aggregate expenditure (AE) model?
Consider the graphical representation of the Keynesian cross for a hypothetical country, where the planned aggregate
spending line is graphed against the 45° line. Suppose that, in this country, there is an autonomous increase in aggregate
spending of $20 billion. Show this change on the graph.
Planned aggregate spending (billions of dollars)
200
180
160
140
120
100
80
60
40
20
0
0
20
45 degree line
40 60 80 100 120 140
Real GDP (billions of dollars)
Planned AB
160 180 200
What is the initial unplanned inventory investment? If the number is negative, be sure to include a negative sign.
Chapter 11 Solutions
EBK PRINCIPLES OF MACROECONOMICS
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- Q.1.7 In the Keynesian macroeconomic model, the equation for the savings function is given as: S = -420 + 1/4Y. Based on this information, which of the following statements is correct? (1) The marginal propensity to consume is 1/4; (2) The marginal propensity to save is -420;arrow_forwardThe 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…arrow_forwardIn the Keynesian model, is aggregate expenditure (AE) exceeds total production an unintended _________ will occur and business will __________. a) inventory reduction; increase production b) inventory reduction; decrease production c) inventory reduction; not change production d) inventory accumulation; decrease production e) inventory accumulation; increase productionarrow_forward
- Consider the graphical representation of the Keynesian cross for a hypothetical country, where the planned aggregate spending line is graphed against the 45° line. Suppose that, in this country, there is an autonomous increase in aggregate spending of $20 billion. Show this change on the graph. 200 180 160 45 degree line 140 120 Planned AE 100 80 60 40 20 0 20 40 60 80 100 120 140 160 180 200 Real GDP (billions of dollars) What is the initial unplanned inventory investment? If the number is negative, be sure to include a negative sign initial unplanned inventory investment: $ billion 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. total change in real GDP: $ billion Planned aggregate spending (billions of dollars)arrow_forwardUse 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 XATarrow_forwardThe figure to the right shows an economy in an initial long-run equilibrium at point A a. Using the line drawing tool, show how, if at all, the equilibrium real GDP and the long-run equilibrium price level are affected by an income tax rebate (the return of previously paid taxes) from the government to households, which they can apply only to purchases of goods and services. Properly label this line. Carefully follow the instructions above, and only draw the required objects b. According to your graph, the equilibrium price level here to search O while the equilibrium real GDP ▼arrow_forward
- a) Given the following simple Keynesian Model: Y = C + I + G + X-M, where Consumption schedule is given as C= 100 +0.75Y Investment (I) = 50 Government (G) = 100 and Net Export (X-M) = 20 i. Calculate the Equlibrium Level of Income ii. Calculate the size of Consumption at the Equilibrium Levelarrow_forwardConsider the graphical representation of the Keynesian cross for a hypothetical country, where the planned aggregate spending line is graphed against the 45° line. Suppose that, in this country, there is an autonomous increase in aggregate spending of $20 billion. Show this change on the graph.arrow_forwardThe 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↑)?arrow_forward
- 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…arrow_forwardShort-run macroeconomic equilibrium is when (Hint: Be careful! Be sure to return to the general definition of equilibrium): Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Firms have no incentive to change how much they produce Households have bought as much as they want The government is content with the level of employment d. Spending is equal to consumption (AE = C)arrow_forwardConsider the graphical representation of the Keynesian cross for a hypothetical country, where the planned aggregate spending line is graphed against the 45° line. Suppose that, in this country, there is an autonomous increase in aggregate spending of $20 billion. Show this change on the graph. Planned aggregate spending (billions of dollars) 88 89 288898 200 180 160 140 120 100 60 40 0 20 40 60 80 100 120 140 45 degree line Planned AB 160 180 200arrow_forward
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