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)
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)
Chapter15: Fiscal Policy
Section: Chapter Questions
Problem 6SQ
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- 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 the C + I function.
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