Question

Answer the following question:

(a) Using the Keynesian Cross, explain how a tax cut, ∆T, affects nation income. Using the appropriate multiplier, what is the magnitude of the change in national income, ∆Y . What is the change in consumption and the change in investment? Explain. (Hint: for investment, what are we treating as exogenous in this model?)

(b) Use the IS-LM model to analyze the effect of the policy in part (a). How does the change in national income compare to what you found in part (a)? What accounts for the difference? How does the change in consumption compare to what you found in part (a)?

Please show all graphs. I have done question A but am Stuck on question B

Answer #1

(Part B)

When a tax cut is implemented, disposable income increases, thus increasing consumption. IS curve shifts rightward, increasing both interest rate and output.

In following graph, IS0 and LM0 are initial IS and LM curves, intersecting at point A with initial interest rate r0 and output Y0. When IS0 shifts right to IS1, it intersects LM0 at point B with higher interest rate r1 and higher output Y1.

In Keynesian cross, when tax falls,

Increase in output (Y) = Decrease in tax x Tax multiplier

But in IS LM model, higher interest rate crowds out private investment, so increase in Y is less than the increase in Y in Keynesian cross,

For the same reason, increase in consumption in IS-LM model is less than the increase in consumption in Keynesian cross,

Suppose you are developing a Keynesian Cross Model with the
following information:
C = 220+(0.75(Y-T), Planned Investment I = 500, G = T= 500
a.
Please find out the equilibrium income.
b.
Please find out what is the consumption at the equilibrium
level.
c.
Please graph the Keynesian Model to locate the equilibrium
between the income and
expenditure.
d.
What level of government purchase is required to achieve an
income level of $ 3700?
e.
What is the mpc for...

how is the equilibrium national income (output) determined?
explain using the Keynesian cross.

Question 1
By relying on the IS LM Model explain what will be the effect of
a tax cut policy on the equilibrium level of income. Explain in
detail the different steps, how does this policy impact the
investment?
Question 2
Keynesian economics assume that prices are sticky (they do not
change) in the short run. It is an assumption shared by classical
economics. Explain briefly what are the characteristics of
classical economists and according to them what drives the...

14. According to the Keynesian Cross model of income, how would
each of the following shocks affect a nation’s real aggregate
income (Y) in the short run, all else equal? For each shock, be
sure to clearly state a predicted direction of change for income,
illustrate your prediction with a Keynesian Cross Diagram, and
explain your predictions intuitively in words.a.Government
purchases decline b. Congress cuts household income taxes c.
Autonomous consumption increases d.Total factor productivity
increases

Consider a closed economy to which the Keynesian-cross analysis
applies. Consumption is given by the equation C = 200 + MPC(Y – T).
Planned investment (I) is 300, government spending (G) is 300 and
taxes (T) is 300. Assume MPC is equal to 2/3.
(a) If Y is 1,500, what is planned spending? What is inventory
accumulation or decumulation? Is equilibrium Y higher or lower than
1,500?
(b) What is equilibrium Y?
(1 mark)
(c) What are equilibrium consumption, private...

In the Keynesian cross model, assume that the consumption
function is given by C=120+0.8(Y−T).
Planned investment is 200; government purchases and taxes are
both 400. Y, C, I G&T are all in billions.
1. Graph planned expenditure as a function of income.
2. What is equilibrium income?
3. If government purchases increase to 420, what is the new
equilibrium income? What is the multiplier for government
purchases?
4. What level of government purchases is needed to achieve an
income of...

Suppose the new government passes a tax cut of Rs. 90. How does
it change the Investment and National savings in each of the
following scenarios?
1- people keep all of the tax cut under their mattress.
2- people spend all of the tax cut on Marvel universe
paraphernalia.
3- people use half the money to buy junk food and cars, and they
keep the rest under their pillows.
e. What happens to the economy when people spend some of...

1. Suppose that the economy begins at potential output. Now,
there is a tax cut. a. Use the Keynesian Cross diagram to show the
effect, if any, of the tax cut on output in the short run. b.
Explain how the economy returns to potential output. Be sure to
describe what happens to inflation and the real interest rate as
the economy returns to potential. c. What effect, if any, will the
tax cut have on the long-run real interest...

The information below describes the current state of the economy
for the Kingdom of Westeros. All coefficients (e.g. m0) represent
positive constants, and c is bounded between 0 and 1. T is lump sum
tax. Assume prices are fixed in the short run.
Real money demand: 0 ( , ) L r Y m kY hr =+− Real money supply: 0
sM z P =
Consumption: 0 () C C c Y T = + −
Learning Objective in this...

In the Keynesian Model assume the following information:
C=1000+0.5Yd I=300 G=200 T=100 here Yd=Y-T. Note that I, G, T,
represents private investment, Government spending and Taxes,
respectively. What are: (i) the total injections and (ii) total
leakages What is the equilibrium level of income, consumption, and
saving and disposable income Assume that the level of output is
1200 how does the economy adjust to equilibrium, specifically
mention inventory levels. Suppose private investment will decrease
by 150, by how much the...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 21 minutes ago

asked 37 minutes ago

asked 54 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago