Question

4. Keynesian Economics

a.What is the Keynesian consumption function?

b.What is the marginal propensity to consume?

c.Reread the textbook material on the simple Keynesian model (pp.258–263, pp 226-230 in the eleventh edition).

i. What is the multiplier?

ii. Suppose the marginal propensity to consume is 0.75.Compute the multiplier

iii. Given the value you computed for the multiplier, compute the amount by which real GDP

increases, when the government increases purchases by $100 billion.

(Note:The value of the mpc and investment expenditures is different than the example cited in the book, but the principle is the same.

Answer #1

The Keynesian consumption function is

C= Cbar + cY, where Cbar is the autonomous consumption that happens even at 0 income and c is the Marginal propensity to consume, Y is income.

The Marginal Propensity to Consume is the proportion of income that one consumes. It is the part of the penny that is consumed. If MPC=0.8, then out of an income of 100, 80 will be consumed.

The multiplier is the value by which the income changes due to a change in the parameters of the model. Generally the income increases by more than 100 %

Multiplier= 1/1-MPC

If MPC= 0.75, multiplier= 1/0.25=4

Therefore if the government increases purchases by $100 billion, thn income increases by $400 billion

A real Keynesian model of a mixed economy with a marginal
propensity to consume equal to .9 produces an equilibrium level of
$2400 billion that is $600 billion below a full employment level of
output.
A) What change in government spending would bring about full
employment? Be sure to calculate the government spending
multiplier.
B) The resulting increase in real output have driven up real
interests rates from 3% to 4% and those higher real interest rates
reduced investment by...

1. A real Keynesian model of a mixed economy with a
marginal propensity to consume equal to .9 produces an equilibrium
level of $2400 billion that is $600 billion below a full employment
level of output.
A) What change in government spending would bring
about full employment? Be sure to calculate the government spending
multiplier.
B) The resulting increase in real output have driven
up real interests rates from 3% to 4% and those higher real
interest rates reduced investment...

Suppose the reserve requirement is 0.20 and the marginal
propensity to consume is 0.92.
a. Calculate the money
multiplier.
b. Calculate the Keynesian
income multiplier.
c. Suppose the coronavirus
pandemic has caused a crash in stock prices and has also negatively
affected business confidence.
(1) What components of
expenditures are affected by the change in confidence, and in what
direction?
(2) Suppose the expenditures in (1) are
affected by $200 billion. Using the Keynesian income...

Suppose the reserve requirement is
0.20 and the marginal propensity to consume is 0.92.
a.
Calculate the money
multiplier.
b.
Calculate the Keynesian income
multiplier.
c.
Suppose the coronavirus
pandemic has caused a crash in stock prices and has also negatively
affected business confidence.
(1)
What components of
expenditures are affected by the change in confidence, and in what
direction?
(2) Suppose
the expenditures in (1) are affected by $200 billion. Using the
Keynesian income...

PART 1
Suppose the government increases education spending by $30
billion. If the marginal propensity to consume is 0.75, how much
will total spending increase?
Instructions: Enter your response as a whole
number.
$_________ billion
PART 2
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moved back up from 4.2 to 6.2 percent. That will reduce...

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