ECON 104 Study Guide - Government Spending

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27 Mar 2014

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Worksheet 4 keynesian model of the economy: consider a closed, simple economy (not necessarily at full employment) with no government, characterized by the following equations, (c is consumption, pdi is personal disposable income, and i is investment): Expenditures: using the graph below, graph the consumption function, investment, and aggregate. Y = income: on the graph, label the point where savings = 0, the point of equilibrium income. Then, derive the values for these using the equations above. Y = c + i y = 500 + 0. 75(dpi) Dpi = 500 + 0. 75(dpi) 0. 25(dpi) = 500. Dpi = 2000 (where s=0) y = 500 + 0. 75(2000) Equilibrium savings = 300 equilibrium investment = 300. New equilibrium savings = 200: now, consider another, more elaborate open economy characterized by the following equations the economy is not necessarily at full employment: (numbers in billions) C = 500 + . 9(pdi) (c is consumption, pdi is y- tx)

Related Questions

Given the following information for the Macro Economy answer the following questions.

In this economy we have an MPC equal to 0.80, Autonomous Consumption of $600 billion, Planned Investment (I) of $1,000 billion, Government Spending (G) of $1,200 billion and Net Taxes (T) of $1,000 billion.

a) Fill in the missing data for: T, Yd, C, S, and AE (in that order in a table) for every level of Y given below (all the numbers are in billions).

Income (Y) Net Taxes (T) Disposable Income (Yd) Consumption (C) Savings (S) Aggregate Expenditures (AE)
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000

b) Determine the Equilibrium level of Aggregate Income (Ye). Please state the reason for your answer.

c) Calculate the Spending Multiplier (show how you got your answer).

d) State in one sentence what your answer in (c) above tells us about any decrease in spending that takes place in the economy.

e) If this economy had a full employment level of income equal to $8,000 billion, what Macroeconomic condition is this economy experiencing.

f) Using the Spending Multiplier, determine the change in G that is needed to get this economy to be in equilibrium at full employment. Please show your work.

g) Using the Spending Multiplier, determine the change in T that is needed to get this economy to be in equilibrium at full employment. Please show your work.

cerisesnake32

2. You are given the following information about the economy: autonomous consumption = $300 billion planned investment = $300 billion government spending = $500 billion mpc = 2/3 imports = $500 billion exports = $200 billion

a. Using the values above, what is the equation for the consumption function?

b. Using the values above, what is the income/spending multiplier?

c. What is the value of Net Exports?

d. Is there a trade surplus or deficit? Of how much?

e. Using these values, what is the equation of aggregate demand?

f. What is the equilibrium level of Y?

g. If full employment Y = $6000 billion, is there a recessionary or inflationary gap?

h. If full employment Y = $6000 billion, what is the GDP gap?

i. What kind of fiscal policy (expansionary or contractionary) could help the economy close the gap?

j. If you decided to change government spending, how much would you change G to close the GDP gap?

k. If the value of the dollar depreciated, how would this affect net exports? AD?

amberkoala41

ECON 104 Study Guide - Government Spending

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