a) State carefully the key assumptions underlying the Keynesian model of the economy. b) Using the "Keynesian Cross" diagram, show the impact of an exogenous shift in government spending, in an Keynesian economy and explain how it illustrates the role of the Keynesian multiplier.
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- 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 unchangedConsider a 4-sector Keynesian model like that discussed in class with the following characteristics: exogenous consumption=10000, exogenous taxation=4000, government spending=5000, exports=5000, planned investment=2000. The marginal propensity to save=50%, the marginal tax rate (t)=30% and the marginal propensity to import (m)=20%. The potential output for the economy is 16000. Note that import demand is given by M=m(1-t)Y. 1. What is the output gap?Consider the following macroeconomy. All amounts are in millions (m.) of $: C = 750 + 0.8 YD I = 1200 G = 150 T = 250 Calculate eqm Y and prove that I=sum of S at this equilibrium. What is meant by the “Paradox of Thrift” (POT)? Go back to the original eqm of part a. Now prove using multiplier analysis that the POT holds in this economy by assuming that the change in co is -$50 m. As part of your answer, explain “intuitively” why this paradox exists. Show what happens in the Z-Y space graph.
- 1. Construct your Keynesian General Equilibrium model in an open economy with government. 2. Make your own assumptions and functions. Give your own numbers. And 3. calculate equilibrium income by two methods. a) One from writing the model and solving the model, b) secondly from all injections should be equal to all leakages. c) Calculate all multipliers and expand your model to show how these multipliers are used.n the Keynesian cross model, assume that the consumption function is given by C = 110 + 0.75(Y - T). Planned investment is 300; government purchases is 350. Assume a balanced budget. a. Graph planned expenditure as a function of income.b. What is the equilibrium level of income?c. If government purchases increase to 400, what is the new equilibrium income? What is the multiplier for government purchases? Solve D and Ed. What level of government purchases is needed to achieve an income of 2,200? (Taxes remain unchanged.)e. What level of taxes is needed to achieve an income of 2,200? (Government purchases remain at 350.)Question 1 (14 marks) Consider the following numerical example of the simple Keynesian model with no government spending, taxes or a foreign sector (all figures in R millions): C = 100 + 0,9Y I = 50 Answer the following questions. What is the value of the marginal propensity to consume (MPC) in this model? (2) What is the value of the multiplier in this economy? (3) Calculate aggregate spending in this economy (2) Calculate the equilibrium level of output. (3) Suppose the level of output that creates full employment (Yf) in the economy is 1 800. Determine the level of investment spending that would create full employment in this economy. (4)
- suppose a Keynesian macroeconomic model is characterized with the following equations: Y = C + I + G Goods markets C = C = 320 + 0.8YdYd = Y − TI = 40 − 40rG = 80T = 50 Money marketsMoney demand:(M/P)d = 500 + 0.8 − rMoney supply: MSP = 800Derive IS and LM equations and derive equilibrium income level and interest rate.There is a simple Keynesian Model of a typical form (as given in the lecture and in the learning materials): (1) Y = C + I (equilibrium condition) (2) C = a + bY (consumption function) (3) I = I0 (investment function) where I0 = 115 a = 10 b = MPC = 0.9 how much is the simple multiplier (also known as a Keynesian multiplier or an expenditure multiplier)?Q.1.14 In the Keynesian model, what is the most important determinant of ahousehold’s consumption?(a) Disposable income.(b) Total wealth.(c) The number of persons in the household.(d) Its’ net wealth. Q.1.15 Induced consumption is: (a) the part of consumption which is independent of the level of income.(b) the minimum level of consumption that is financed from sources otherthan income.(c) The maximum level of consumption that is financed from sources otherthan income.(d) shown by the slope of the consumption function.Q.1.16 In the Keynesian model, an introduction of a proportional tax will: (a) increase the slope of the consumption function.(b) reduce the multiplier.(c) increase the equilibrium level of income.(d) increase the multiplier.Q.1.17 A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.
- Consider two standard Keynesian models. In Model 1, there are two types of consumers, Type A,who have low marginal propensities to consume, and Type B, who have high marginalpropensities to consume. In Model 2, there are only Type A consumers. Then, a decrease in theexogenous taxes would lead to higher output in Model 2 than in Model 11. Induced consumption is: (a) the part of consumption which is independent of the level of income.(b) the minimum level of consumption that is financed from sources otherthan income.(c) The maximum level of consumption that is financed from sources otherthan income.(d) shown by the slope of the consumption function.2. In the Keynesian model, an introduction of a proportional tax will: (a) increase the slope of the consumption function.(b) reduce the multiplier.(c) increase the equilibrium level of income.(d) increase the multiplier.3. A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.The 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…