ECON 104 Study Guide - Government Spending

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Worksheet 4 keynesian model of the economy: 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): Expenditures: using the graph below, graph the consumption function, investment, and aggregate. Y = income: on the graph, label the point where savings = 0, the point of equilibrium income. Then, derive the values for these using the equations above. Y = c + i y = 500 + 0. 75(dpi) Dpi = 500 + 0. 75(dpi) 0. 25(dpi) = 500. Dpi = 2000 (where s=0) y = 500 + 0. 75(2000) Equilibrium savings = 300 equilibrium investment = 300. New equilibrium savings = 200: now, consider another, more elaborate open economy characterized by the following equations the economy is not necessarily at full employment: (numbers in billions) C = 500 + . 9(pdi) (c is consumption, pdi is y- tx)

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