Planned Actual expenditure expenditure, PE PE Planned expenditure PE, PE2 PE Y Y2 Y3 Income, output Y In the Keynesian Cross shown above we know: Y2 = 650, Y3 = 800, and PE3 = 740.
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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…Consider the Aggregate expenditure model. Where:AD = C + I + G + NX (1)where I, G, and NX are all autonomous.C = C + c∗(Y + T R − T A)(2)where T A = tY with t ∈ [0, 1] is the proportional tax rate and c∗ ∈ (0, 1) is themarginal propensity to consume.a. Using the information above, solve for AD. Combineall the autonomous terms into one term, A. b. In an (x, y) plane, where Y is on the horizontal axis and AD is on thevertical axis, illustrate the AD curve you derived above along with the 450line.Make sure to explain how you got the Y-intercept and solve for the slope c. Provide an economic interpretation for the slope of the AD function. d. Solve for the equilibrium level of output and show what happens to outputwhen G increases by 1 unit. That is, what is ∆Y ? Show your result graphicallyand explain how the AD curves shifts and by how much. Briefly explain.If the Keynesian consumption function were C = 2,000 + 0.75YD , what would the value of the tax multiplier be, and how much would equilibrium $output/$income, Y, change if taxes were decreased by 200? Group of answer choices A) Tax multiplier = - 4 ; change in Y = + $160 B) Tax multiplier = - 5 ; change in Y = + $1,000. C) Tax multiplier = - 4 ; change in Y = + $800. D) Tax multiplier = - 5 ; change in Y = + $4,000. E) Tax multiplier = - 3 ; change in Y = + $600.
- In a keynesian model it is assumed that the consumption function is given by C= 2000 + 0.75 (Y-T) and the planned investment is 1,000 government purchases and taxes are both of those and formulate and draw a graph of planned expenditure as a function of income What is the equilibrium level in the part above If the government purchases increased by 1250 what is the equilibrium income With the aid of a algebra prove that a balanced budget multiplier is always equals to 1Problem 1 Consider the Aggregate expenditure model. Where:AD = C + I + G + NX where I, G, and NX are all autonomous.C = C + c∗(Y + T R − T A where T A = tY with t ∈ [0, 1] is the proportional tax rate and c∗ ∈ (0, 1) is the marginal propensity to consume.a. Using the information above, solve for AD. Combineall the autonomous terms into one term, A. b. In an (x, y) plane, where Y is on the horizontal axis and AD is on thevertical axis, illustrate the AD curve you derived above along with the 45degreeline.Make sure to explain how you got the Y-intercept and solve for the slope. c. Provide an economic interpretation for the slope of the AD function. d. Solve for the equilibrium level of output and show what happens to outputwhen G increases by 1 unit. That is, what is ∆Y ? Show your result graphicallyand explain how the AD curves shifts and by how much. Briefly explain. e) Suppose that ∆G = −1 and ∆T R = +2. Show what happens to theequilibrium level of output. Explain your resultIn the Keynesian cross model, assume that the consumption function is given byC = 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?d. 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.)
- 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.)115.) If the marginal propensity to consume is 0.6, then according to the Keynesian Cross, the tax multiplier is -$3 -$1.5 -$0.6 none of the aboveAssume: Y= C + I + G + NX C = 400 + (0.8)YD Io = 200 G = 300 + (0.1)(Y* - Y) YD = Y - TA + TR NXo = - 40 TA = (0.25)Y TRo = 50 From the model above you can see that government purchases (G) are counter-cyclical, that is, G is increased as national income decreases. If you compare this specification of G with one that has a constant level of government spending (for example, Go = 300), how would the value of the expenditure multiplier differ?
- If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP $200 million, then by how much would they have to change taxes? A.decrease by $240 million. B.decrease by $160 million. C.decrease by $180 million. D.decrease by $50 million.Keynesian cross" exercises Let the economy in our numerical example be: C = 70 + 0.75Y I = 60 Y* = 520 Exercise 1: Add government spending G = 100, not financed by taxes by taxes Show that the new equilibrium income is: Y = 920 What is the government spending multiplier? Exercise 2 : Redo your work assuming that: 1. government spending (G: 100) is financed (in part) by a per capita tax 1. public spending (G: 100) is financed (partly) by a per capita tax (capitation) whose total amount is T=80 and, 2. the marginal propensity to consume is applied to disposable income Calculate the new equilibrium income (Y2) and the disposable income (Y ;) What is the multiplier for the government's balance? Exercise 3: If government spending is financed by a 10% income tax and the propensity to consume is applied to disposable income, calculate the equilibrium income (Y2*) (Y2*) and disposable income (Y;) In this case, what is the government's balance of payments multiplier?Autonomous Spending: $1,000 Invest2, 000 Government Spending: $3, 000 Exports: $500 C1: .55 Tax Rate: .22Marginal Propensity to Import: .09 If Investment drops by 20%, and if the government decides not to spend, whatwould the new tax rate have to change to in order to offset the drop in Y?
