Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 11, Problem 1PA
(a)
To determine
The impact of an increase in the government purchases on equilibrium GDP based on the Keynesian cross.
(b)
To determine
The impact of an increase in taxes on equilibrium GDP based on Keynesian cross.
(c)
To determine
The impact of an equal-sized increases in both government purchases and taxes on equilibrium GDP based on Keynesian cross.
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Use the Keynesian cross Diagram to depict the following:1- An increase in Government purchases [3]2- An Increase in taxes. [3]3- Automatic adjustment towards equilibrium when AE>PE. [4]
Suppose Congress decides to reduce the budget deficit by cutting government spending.
a. Use the Keynesian-cross model to illustrate graphically the impact of a reduction ingovernment purchases on the equilibrium level of income. Be sure to label: i) the axes;ii) the curves; iii) the initial equilibrium values; iv) the direction the curve shifts; andv) the terminal equilibrium values.
b. Explain what happens to equilibrium income as a result of the cut in governmentspending.
Use the Keynesian cross to predict the impacton equilibrium GDP of the following. In eachcase, state the direction of the change and give aformula for the size of the impact.a. An increase in government purchasesb. An increase in taxesc. Equal-sized increases in both governmentpurchases and taxes
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- Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with national income. (Examples in the United States include the income tax and the payroll tax.) Let’s represent the tax system by writing tax revenue as T = T− + tY, where T− and t are parameters of the tax code. The parameter t is the marginal tax rate: if income rises by $1, taxes rise by t × $1. 1.How does this tax system change the way consumption responds to changes in GDP? 2. Im the Keynesian cross, how does this tax system alter the government purchases multiplier? 3. In the IS–LM model, how does this tax system alter the slope of the IS curve? (solve all three tasks)arrow_forwardIf a Keynesian model shows that aggregate demand for both goods and labor has shifted to the left, while wages are sticky and remain at the same level and prices remain at the same prices, what will be the result in the labor market? a a shortage of labor b depression c coordinated wage reductions d a surplus of laborarrow_forwardI need help on this using 1. Keynesian cross and IS-Lm modelarrow_forward
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