Chapter 1. Chapter 10 – Problem 2

Step 1

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

Question

In the Keynesian cross model, assume that the consumption function is given by

C = 200 + 0.75 (Y – T).

Planned investment is 100; government purchases and taxes are both 100.

a & b. Below is a graph of planned expenditure as a function of income. What is the equilibrium level of income?

Y = tU4czVQoYt5++ZKAt6AxcQ==

Review Section 10-1 and Figures 10-2 and 10-3 for a discussion of planned expenditure and equilibrium in the Keynesian cross model.
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Step 2

Question

In the Keynesian cross model, assume that the consumption function is given by

C = 200 + 0.75 (Y – T).

Planned investment is 100; government purchases and taxes are both 100.

c. If government purchases increase to 110, what is the new equilibrium income? What is the multiplier for government purchases?

Y = iLlnV6Iwr6fgU7ZwOztMjw==

Multiplier = h4XZagboIgc=

Review Section 10-1 and Figure 10-5 for a discussion of multipliers in the Keynesian cross model.
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Step 3

Question

In the Keynesian cross model, assume that the consumption function is given by

C = 200 + 0.75 (Y – T).

Planned investment is 100; government purchases and taxes are both 100.

d. What level of government purchases is needed to achieve an income of 1,420? (Taxes remain at 100.)

G = DMbfwWV3u74=

Review Section 10-1 and Figure 10-2 and 10-3 for a discussion of equilibrium in the Keynesian cross model.

Question

e. What level of taxes is needed to achieve an income of 1,420? (Government purchases remain at 100.)

T = 05dveybDphA=

Review Section 10-1 and Figure 10-2 and 10-3 for a discussion of equilibrium in the Keynesian cross model.
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