ECON 104 Lecture Notes - Lecture 6: Keynesian Cross, Forklift, Consumption Function

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10 Sep 2016

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Macroeconomics 2/8/16: circular flow, aggregate spending and equilibrium output/income. Inflation: inflation = percent change in the consumer price index (cpi, us inflation has been < 3% for 25 years, chs 8-9 assume zero inflation. Key question in chs 8-9: how does the market behave by itself, with no government intervention, in ch. 8 we introduce keynesian ideas using the simplest possible model. We introduce the keynesian cross diagram, the concept of equilibrium in this model, the idea of the multiplier, and several other basic tools: in ch. 9 we add a very few elements to the model, mostly government, to see how the government can act to change equilibrium gdp and create jobs. Bean"s snow boots were back ordered till june. You couldn"t buy them for love or money. Look first at the lower right: payment from firms to households is the income of households.

Related Questions

1. Suppose that real GDP is currently â$13.55 trillion and potential real GDP isâ $14.0 trillion, or a gap of â$500500 billion. The government purchases multiplier LOADING... is 2.52.5â, and the tax multiplier is 1.51.5. Holding other factorsâ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potentialâ GDP? Government spending will need to be increased by â$____ billion. â(Enter your response rounded to the nearest wholeâ number.)

2. Suppose the government increases taxes by â$120 billion and the marginal propensity to consume is 0.50. By how will equilibrium GDPâ change?

The change in equilibrium GDPâ is: â$_____ billion. â(Round your solution to one decimalâ place.)

Westville, a small developedâ country, is experiencing a very high rate of inflation. Romaâ Anderson, a market researchâ analyst, thinks that the high level of inflation is due to an acute shortage of goods available in the economy. According toâ her, the government should use expansionary fiscal policies to boost the economy.â Meanwhile, Robertâ Simpson, a member of the financeâ ministry, is of the opinion that the high level of inflation is the result of excessive household spending. He suggests that the government should increase personal income tax rates to curb consumption demand.

Which of theâ following, ifâ true, will strengthenâ Robert's claim that high consumer spending is the cause of highâ inflation?

The number of discouraged workers in Westville has increased this year.

Leading firms producing consumer durables have reported a decline in profits in recent times.

There is consensus among leading economists and industry experts that the output gap in Westville is currently negative.

The gender wage gap in Westville has increased substantially in the last few years.

One ofâ Westville's leading trading partners was recently hit by a severe recession.

Data for 9-4 Homework: Problem Set

GDP	Taxes	DI	C	I	G	C+I+G
1250	200		800	300	200
1500	200		1000	300	200
1750	200		1200	300	200
2000	200		1400	300	200
2250	200		1600	300	200
2500	200		1800	300	200
2750	200		2000	300	200

This table represents several different potential output scenarios for a hypothetical economy. Based on the information presented, complete the following:

1. Calculate the Disposable Income (DI) at each level of GDP.
2. Calculate total spending (C+I+G) at each level of GDP.
3. What is the equilibrium level of GDP in the economy?
4. When the economy is at equilibrium, what is the level of saving?
5. What is the value of the MPC?
6. What is the value of the expenditure multiplier?
7. What is the value of the tax multiplier?
8. If the government increases spending by $100, what would be the new equilibrium value of GDP?
9. If the government wanted to achieve the same change in GDP as in part 8 by cutting taxes instead of increasing spending, how large would the tax cut need to be?

redhornet138

1. The multiplier helps explain

A. why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.

B. why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.

C. why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.

D. why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.

2. If the marginal propensity to save (MPS) increases, the multiplier

A. decreases.

B. can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).

C. stays the same.

D. increases.

QUESTION 60

The investment function will shift when there is a change in

		A. the opportunity cost of retained earnings.
		B. firms' profit expectations.
		C. the cost of borrowing.
		D. the interest rate.

1.43 points

QUESTION 61

In the Keynesian model, whenever planned saving exceeds planned investment,

		A. there will be unplanned inventory accumulation.
		B. real GDP will not be influenced.
		C. the interest rate will remain unchanged.
		D. there will be unplanned inventory depletion.

1.43 points

QUESTION 62

In the Keynesian model, whenever planned saving is less than planned investment,

		A. there will be unplanned inventory depletion.
		B. the interest rate will remain unchanged.
		C. there will be unplanned inventory accumulation.
		D. real GDP will not be influenced.

1.43 points

QUESTION 63

Government purchases

		A. are determined by the political process.
		B. are determined by the public.
		C. are influenced by interest rates.
		D. are determined by suppliers.

1.43 points

QUESTION 64

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

		A. real GDP will either fall or remain unchanged, depending on the MPC.
		B. real GDP will rise.
		C. real GDP remains unchanged.
		D. unplanned inventories will increase and real GDP will fall.

1.43 points

QUESTION 65

When the economy is operating at the equilibrium level of GDP, we know that

		A. total planned real expenditures equal real GDP.
		B. real net exports equal inventory changes.
		C. planned real investment spending equals real net exports of zero.
		D. total planned real consumption expenditures equal real GDP.

1.43 points

QUESTION 66

One divided by the marginal propensity to save (MPS) is the formula for

		A. the inverse of the multiplier.
		B. the multiplier.
		C. one minus the multiplier.
		D. autonomous consumption.

QUESTION 67

Thinking like an economist would, which is true of investment?

		A. Investment represents spending on capital goods.
		B. Investment is a stock concept.
		C. Investment is putting money into stocks and bonds.
		D. It is the portion of disposable income that is not used for consumption or saving.

QUESTION 68

Other things being equal, if input prices rise in a country, then there would be

		A. cost-push inflation.
		B. demand-pull inflation.
		C. cost-pull deflation.
		D. more production and a lower price level.

QUESTION 69

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

		A. existing capital equipment can be used more intensively.
		B. wage rates rise almost simultaneously with the price level.
		C. the unemployment rate usually rises dramatically along with the price level.
		D. workers can be switched from counted to uncounted production.

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ECON 104 Lecture Notes - Lecture 6: Keynesian Cross, Forklift, Consumption Function

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