The Modified Keynesian Model
Y = C + I + G + X â IM ⦠equilibrium condition in a 4-sector model where:
C = 150 + 0.9DI ⦠consumption function
I = 50 ⦠autonomous investment
G = 100 ⦠autonomous government spending
X = 200 ⦠autonomous exports
IM = 100 ⦠autonomous imports
And also:
DI = Y â T + Tr T = 0 ⦠autonomous taxes
Tr = 0 ⦠autonomous transfer payments
YF = 5000 ⦠full-employment Y
1. Solve for the equilibrium level of real output/income (Y*) in this economy.
2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?
3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.
4. What is the value of the MPC? ⦠the value of the MPS?
5. Calculate the âoversimplifiedâ expenditure multiplier.
6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?
7. (Refer to question â6â.) How much is the gap equal to?
8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?
9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?
10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?
11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?
The Modified Keynesian Model
Y = C + I + G + X â IM ⦠equilibrium condition in a 4-sector model where:
C = 150 + 0.9DI ⦠consumption function
I = 50 ⦠autonomous investment
G = 100 ⦠autonomous government spending
X = 200 ⦠autonomous exports
IM = 100 ⦠autonomous imports
And also:
DI = Y â T + Tr T = 0 ⦠autonomous taxes
Tr = 0 ⦠autonomous transfer payments
YF = 5000 ⦠full-employment Y
1. Solve for the equilibrium level of real output/income (Y*) in this economy.
2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?
3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.
4. What is the value of the MPC? ⦠the value of the MPS?
5. Calculate the âoversimplifiedâ expenditure multiplier.
6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?
7. (Refer to question â6â.) How much is the gap equal to?
8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?
9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?
10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?
11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?
Related textbook solutions
Related questions
Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.
| C = 0.8(DI) + 1000 | C = Consumption expenditure, DI = Disposable Income |
| I = 2000 | I = Investment expenditure |
| G = 1000 | G = government expenditure |
| X = 1600 | X = spending on exports |
| M = 1800 | M = spending on imports |
| DI = Y - T | Y = real GDP, T = tax revenues/> |
| T = 1000 | |
| Yp = 12000 | Yp = Potential GDP |
Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.
| a. |
inflationary gap |
|
| b. |
recessionary gap |
|
| c. |
no output gap |
|
| d. |
government budget surplus |
|
| e. |
government budget deficit |
|
| f. |
balanced government budget |
|
| g. |
trade deficit |
|
| h. |
trade surplus |
|
| i. |
net exports of zero |
