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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