Chapter 1. Chapter 11 – Question 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. Below is a graph of planned expenditure as a function of income. What is the equilibrium level of income?

The vertical axis is labeled “PE”, which is the planned expenditure, and the horizontal axis is labeled “Y”, which is the income. The function represented by the line on this graph has a slope of 0.75 and intersects the vertical axis at 325.

Y = tU4czVQoYt5++ZKAt6AxcQ==

Review pages 313-316 and Figures 11-2 and 11-3 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.

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

Y = iLlnV6Iwr6fgU7ZwOztMjw==

Multiplier = h4XZagboIgc=

Review pages 316-319 and Figure 11-5 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.

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

G = DMbfwWV3u74=

Review pages 313-316 and Figure 11-2 and 11-3 for a discussion of equilibrium in the Keynesian cross model.

Question

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

T = 05dveybDphA=

Review pages 313-316 and Figure 11-2 and 11-3 for a discussion of equilibrium in the Keynesian cross model.

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