Question

Suppose the following information regarding some aggregate economy:

Consumption: 200 + 0.75Y

Investment: 100 + 0.10Y

Government Spending: 500

Exports: 100

Imports: 50 + 0.25Y

Compute the Keynesian multiplier for this economy. Explain (i) its meaning (causes and consequences), and (ii) why is it larger than 1 but not infinite

Answer #1

Use AE = C + I + G + NX

AE = 200 + 0.75Y + 100 + 0.10Y + 500 + 100 - 50 - 0.25Y

AE = 850 + 0.60Y

Keynesian multiplier = 1/1-0.60 = 2.5

This implies that when aggregate expenditure by $1, income rises by $2.5. As and when the government uses its spending to end the recession, the increase in government spending is multiplied due to the multiplier and income is increased by multiple times.

It is greater than 1 because one part of disposable income is consumed domestically, one other part is spent on imports and the remaining is saved. Hence the denominator is always less than 1 so that overall the multiplier is always 1. It cannot be infinity because some portion of increased income goes to consumption definitely.

Suppose an economy is represented by the following
equations.
Consumption function C = 300 + 0.8Yd
Planned investment I = 400
Government spending G = 500
Exports EX = 200
Imports IM = 0.1Yd
Autonomous Taxes T = 500
Marginal Tax Rate t=0.25
Planned aggregate expenditure AE = C + I + G + (EX - IM)
By using the above information calculate the equilibrium level of
income for this economy and explain how multiplier changes when we
have an...

The questions below are based on the following information,
which relates to the Keynesian model for an open economy:
C = R600 million + 0.75Y
Z = R200 million + 0.45Y
T = 0.20Y
Where:
C = Consumption
Y = Income
Z = Imports
T = Tax
Additionally:
Investment spending = R350 million
Government spending = R500 million
Exports = R350 million
Full employment level of income = 3 000 million.
1.1Calculate the value of the marginal propensity to save....

For a specific model where the consumption function is given as
C = 100 + 0.75Y, while investment is 60, with no government
purchases and no net exports,
A) find the equilibrium level of income
B) Find the level of savings
C) if, for some reason, output is at the level of 700, what will
the level of unplanned inventory be?
D) if I rises to 80, what will the effect be on the
equilibrium income?
E) what is the...

1.Which of the following is a true statement about the
multiplier? *
The multiplier effect does not occur when autonomous
expenditures decrease
The multiplier is a value between zero and one
The smaller the MPC, the larger the multiplier
The multiplier rises as the MPC rises
2.According to the Keynesian model of the macroeconomic, the
most effective means for closing a recessionary gap is *
Decrease in marginal tax rates which shift SRAS
Increases in government spending which shift AD...

The following table shows some information on a hypothetical
economy. The table lists real GDP, consumption (C), investment (I),
government spending (G), net exports (X – M), and aggregate
expenditures (AE). In this problem, assume that investment,
government spending, and net exports are independent of the
economy's real GDP level.
Real GDP
C
I
G
X – M
AE
Unplanned Inventory Investment
Direction of Real GDP and Employment
$400
$300
$50
$100
$0
-$50
$500
$50
$100
$0
$500...

1.Suppose that for a particular economy and period, investment
was equal to RM 200 billion, government expenditure was equals to
100, net taxes[TA] were fixed at 150 and consumption was
represented by below function C= 20+0.6YD
a. What is the level of equilibrium income?
b. What is the value of government expenditure multiplier?
c. What is the value of the tax multiplier?
d. If investment decline by RM100 billion, what will be the new
equilibrium
2.Assume investment = 100, government...

In an open keynesian economy, the domestic households’
consumption Cpl = 100 + 0,75Yd, investment I = 400, the net tax
rate t = 0,2, government expenditure on goods and services G = 300,
exports X = 200, and the marginal propensity to import MPI =
0,1.
a) Calculate the equilibrium output in this economy.
b) Demonstrate whether leakages equal injections to the circular
flow.

AE = C + I + G + (X-M)
C – Consumption
I – Investment
G – Government Spending
X – Exports
M – Imports
AE = Y
Y = Income/Output
C = Autonomous Consumption (a) + Marginal Propensity to Consume
(MPC)*Y
i. Autonomous Consumption (a) – Consumption from Wealth (Past
Savings)
*Autonomous Consumption can also be affected by Expectations,
Household Debt, and Taxes. ii. Marginal
Propensity to Consume (MPC) – The percentage of every new dollar of...

In an economy where GDP equals 100, consumption equals 67,
investment equals 14, and government purchases equal 21,
a) exports must exceed imports by 2.
b) taxes must exceed government purchases by
2.
c) imports must exceed exports by 2.
d) net exports must equal 2.
e) none of the above.

An open economy is described by the following system of
macroeconomic equations, in which all
macroeconomic aggregates are measured in billions of Namibian
dollars, N$.
Y = C + I + G + X – M
C = 160 + 0.6Yd
T = 150 + 0.25Y
I = 150
G = 150
E = 300
M = 50 + 0.1Y, Yf = 1500
Where: Y is domestic income
Yd is private disposable income
C is aggregate consumption spending
T is...

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