2 Pages
Unlock Document

ECON 104
Valerie Voorheiis

MICHAEL FAVORITO Introduction to Macroeconomics Econ 104a,c,d – Spring 2012 Due 2/24 Worksheet 4 – Keynesian Model of the Economy 1. 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): C = 200 + .75(PDI) I = 300 a. Using the Graph below, graph the Consumption Function, Investment, and Aggregate Expenditures. AE 500 200 Y = Income 0 Red= Consumption Function Green= Aggregated Expenditures Yellow-= Investments b. On the Graph, label the point where Savings = 0, the point of equilibrium income. Then, derive the values for these using the equations above. AE= Y, Y=PDI , Y= C+I= 200+.75PDI+300 Y= 500 +.75Y  .25Y=500  Y=2000 200+.75Y=Y  Y=800 Savings = 0, Income = 800 Equilibrium Income = 2000 c. At Equilibrium, how much are consumers saving? Investment? At equilibrium, Y= AE, then S=I. So when investment is at 300, savings is also at 300. Equilibrium Savings = 300 Equilibrium Investment = 300 What is the relationship between these two concepts in the model? - Savings and investment are equal to each other at equilibrium. - d. What happens to equilibrium Income and Savings when Investors get pessimistic and reduce Investment to 200? - Since S=I in equilibrium savings is also reduced to 200. New Equilibrium Income = 1600 New Equilibrium Savings = 200 2. Now, consider another, more elaborate open economy characterized by the fol
More Less

Related notes for ECON 104

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.