The Modified Keynesian Model
Y = C + I + G + X â IM ⦠equilibrium condition in a 4-sector model where:
C = 150 + 0.9DI ⦠consumption function
I = 50 ⦠autonomous investment
G = 100 ⦠autonomous government spending
X = 200 ⦠autonomous exports
IM = 100 ⦠autonomous imports
And also:
DI = Y â T + Tr T = 0 ⦠autonomous taxes
Tr = 0 ⦠autonomous transfer payments
YF = 5000 ⦠full-employment Y
1. Solve for the equilibrium level of real output/income (Y*) in this economy.
2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?
3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.
4. What is the value of the MPC? ⦠the value of the MPS?
5. Calculate the âoversimplifiedâ expenditure multiplier.
6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?
7. (Refer to question â6â.) How much is the gap equal to?
8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?
9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?
10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?
11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?
