Introduction to Macroeconomics Econ 104a,c,d – Spring 2012
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
Y = Income
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
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