- Define the slope and y-intercept of the expenditure function?
- Explain what the 45 degree line represents
It represents the set of points where aggregate expenditure in the economy is equal to output, or
- Use the
aggregate expenditure-output model to demonstrate the multiplier effect.
- Distinguish between fiscal and
monetary policy .
The monetary policy involves changing the interest rate and influencing the money supply. The fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy.
- Suppose the marginal propensity to consume (MPC) is 0.8. Determine the tax multiplier of this economy.
- Suppose the marginal propensity to consume (MPC) is 0.6. Determine the government spending multiplier of this economy.
With the MPC being 0.6 the multiplier is 2.5
- Assume the MPC is 0.75 and autonomous investment increases by 60 billion. What will be the impact on real GDP?
- Assume the MPC is 0.8, & equilibrium real GDP is $450 billion. If the tax level increases by $25 billion what will be the new equilibrium level of real GDP?
- Suppose in Nicholsville the following data prevails:
a = $50 Imports = 40 MPC = 0.8
I = $350 Exports = 50 G = $250
C = a + MPC(Y – T) T = $200
- Construct an expenditure function for Nicholsville.
- Calculate this economy’s equilibrium level of output.
- Using the Keynesian Model graph Nicholsville’s economy.
- Suppose in Nicholsville there is a budget deficit of $50 and a trade surplus of $15 and the following data prevails:
a = $70 MPC = 0.5 Full-employment GDP = $1000
I = $200 Exports = 55 G = $200
- Construct an expenditure function for Nicholsville.
- Calculate this economy’s equilibrium level of output.
- Suppose in Nicholsville the following data prevails:
a = $50 G = $300 imports = $100 full-employment GDP = $2000
I = $300 T = $300 exports = $50 MPC = 0.8
- Construct an expenditure function for Nicholsville.
- Calculate this economy’s equilibrium level of output.
- Calculate the GDP gap of this economy.
- By how much would Investment spending have to go up to achieve full-employment GDP?
- Using the aggregate expenditure-output model (i.e. the Keynesian Cross model), illustrate the condition of a recessionary gap, and depict the multiplier effect in your graph.
- Employing an aggregate expenditure-output model illustrate an economy that experiences a significant decrease in government spending. Briefly explain the economics of what is going on in your graph.
- Assume an economy is in recession with a MPC of 0.75 and there is a GDP gap of $200. How much must government spending increase to eliminate the gap?
- Assume an economy is in recession with a MPC of 0.75 and there is a GDP gap of $350. How much must taxes be cut to eliminate the gap?
- Suppose the current equilibrium GDP is $100Billion, full-employment GDP is $125Billion. Further suppose the MPC is 0.90 and there is a legislative mandate for the country to run a balanced-budget. By how much would government spending need to be raised to achieve full-employment?
- Suppose in Nicholsville MPC is 0.9 and real equilibrium GDP is $400 billion dollars now assume a real estate crisis that lowers investment spending by $4 billion. Calculate the new level of equilibrium GDP.
- What are the policy tools of the Federal Reserve.
- Graphically illustrate an economy in a severe recession.
- Graphically illustrate an economy in at full-employment equilibrium.
- Congratulation! You have been appointed an economic policy advisor to the President. Your data shows that the economy is significantly below potential output. From the data you expect: Banking credit has be curtailed, hence investment spending significantly decreased. Clearly explain what will happen to equilibrium GDP and illustrate your graph in Keynesian expenditure graph.
- Suppose the economy has been operating above potential GDP and inflationary pressures rise. Specifically explain the policy you recommend in this situation.
- What are the potential weaknesses of the monetary policy
- What are the potential weaknesses of tax cuts as fiscal policy
- What are the weaknesses of government spending as fiscal policy
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