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ECON 2030 STUDY PROBLEM IN KEYNESIAN MACROECONOMICS

GIVEN: C = 100 + 0.8Y I = 50 G = 60; T = 0 Y fe = 1300. ECON 2030 STUDY PROBLEM IN KEYNESIAN MACROECONOMICS. GIVEN: C = 100 + 0.8Y I = 50 G = 60; T = 0 Y fe = 1300. ECON 2030 STUDY PROBLEM IN KEYNESIAN MACROECONOMICS. What is the value of the MPC?.

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ECON 2030 STUDY PROBLEM IN KEYNESIAN MACROECONOMICS

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  1. GIVEN: C = 100 + 0.8Y I = 50 G = 60; T = 0 Yfe = 1300 ECON 2030 STUDY PROBLEM IN KEYNESIAN MACROECONOMICS

  2. GIVEN: C = 100 + 0.8Y I = 50 G = 60; T = 0 Yfe = 1300 ECON 2030 STUDY PROBLEM IN KEYNESIAN MACROECONOMICS What is the value of the MPC? MPC = b = 0.8 What is the value of the MPS? MPS = 1 - b = 0.2 Note that the two marginal propensities sum to one.

  3. What is the significance of the “100” in the equation C = 100 + 0.8Y? C People spend “100” on consumption goods even when their income is temporarily zero. Where does the b = 0.8 show up on this graph? b 1 0 < b < 1 a = 100 The coefficient of Y (symbolized by “b” and always between 0 and 1) is the slope of the consumption equation. Y

  4. Calculate the investment multiplier and the government spending multiplier. C The spending multipliers are given by the expression 1/(1 – b). b 1 a = 100 1/(1 – b) = 1/(1 – 0.8) = 1/ 0.2 = 5 Y

  5. Write the saving equation that corresponds to the given consumption equation. S, C C = a + bY S = -a + (1 – b)Y C = 100 + 0.8Y b 1 S = -100 + 0.2Y a = 100 1-b 1 Y

  6. At what income does saving equal zero? S, C S = -100 + 0.2Y = 0 -100 = - 0.2Y Y = 100/0.2 Y = 500 C = 100 + 0.8Y b 1 S = -100 + 0.2Y a = 100 1-b 1 Y 500

  7. How much is aggregate demand when income is equal to 1100? E C + I + G C = 100 + 0.8Y C = 100 + 0.8(1100) C = 100 + 880 C = 980 C + I C C = 980 I = 50 G = 60 C + I + G = 1090 a = 100 Y 500

  8. How much is aggregate demand when income is equal to 1100? E C + I + G When Y = 1100 C + I + G = 1090 Y > C + I + G C + I C Is the economy in equilibrium when income is 1100? a = 100 No. There are excess inventories in the amount of 1100 – 1090 = 10. Y 500

  9. Locate Y = 1100 and Yfe = 1300 relative to equilibrium income. E C + I + G When Y = 1100 C + I + G = 1090 Y > C + I + G C + I C Excess inventories = 10 G = 60 I = 50 C = 980 a = 100 Y 500 1100 1300

  10. How do C, F, & O calculate GDP at Y=1100 E Here’s one way: GDP = Y = 1100 Here’s the alternative way: GDP = C + I + G + Excess Inv. C + I + G C + I C GDP = 980 + (50+10) +60 GDP = 1100 Excess inventories = 10 G = 60 I = 50 C = 980 a = 100 Y 500 1100 1300

  11. What is the economy’s equilibrium income? E Y = C + I + G Y = 100 + 0.8Y + 50 + 60 Y – 0.8 Y = 210 0.2Y = 210 Y = 1050 C + I + G C + I C Excess inventories = 10 G = 60 I = 50 C = 980 a = 100 Y 500 1100 1300 1050

  12. Describe the market process that brings about this Keynesian equilibrium. E C + I + G Excess inventories result in cutbacks and layoffs. C + I C Y and C spiral downward. Excess inventories = 10 G = 60 I = 50 C = 980 a = 100 Y 500 1100 1300 1050

  13. Describe the market process that brings about this Keynesian equilibrium. E C + I + G Excess inventories result in cutbacks and layoffs. C + I C Y and C spiral downward. The spiraling stops when there are no longer any excess inventories and when Y = C + I + G. a = 100 Y 500 1100 1300 1050

  14. What does the labor market look like when this Keynesian equilibrium is established? E C + I + G The demand for labor is not sufficiently strong to C + I C clear the labor market at the going wage rate. S W Going wage rate Y= 1050 a = 100 D N Y 500 1300 1050

  15. Suppose that the government increases government spending by 30. E What does this do to equilibrium income? C + I + G C + I C Y = 1/(1-b) G Y = 5 (30) Y = 150 G = 30 a = 100 Y = 150 Y 500 1200 1300 1050

  16. How much more government spending is required to achieve E full employment? C + I + G C + I C G = 20 S W Y = 5 G 100 = 5 G G = 20 Going wage rate G = 30 D Y = 1300 a = 100 Y = 150 Y = 100 N Y 500 1200 1300 1050

  17. John Maynard Keynes 1883-1946

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