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ECON 104
Valerie Voorheiis

Introduction to Macroeconomics Econ 104 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=C+I C AE S=0 I = 300 200 0 Y = Income 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 = C + I AE = Y Y = C + I  Y = 500 + 0.75(DPI) & Y = DPI DPI = 500 + 0.75(DPI)  0.25(DPI) = 500 DPI = 2000 (WHERE S=0)  Y = 500 + 0.75(2000) Y = 2000 Savings = 0, Income = 2000 Equilibrium Income = 2000 c. At Equilibrium, how much are consumers saving? Investment? Equilibrium Savings = 300 Equilibrium Investment = 300 What is the relationship between these two concepts in the model? At equilibrium, S = I d. What happens to equilibrium Income and Savings when Investors get pessimistic and reduce Investment to 200? Income would decrease New Equilibrium Income = 1600 New Equilibrium Savings = 200 2. Now, consider another, more elaborate open e
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