Worksheet4.macromodel.doc

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Department
Economics
Course
ECON 104
Professor
Valerie Voorheiis
Semester
Spring

Description
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
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