STUDY PROBLEM IN KEYNESIAN MACROECONOMICS II

1. What is the MPC? It's 0.8. What is the MPS? It's 0.2. What is the investment multiplier? It's 5. What is the government-spending  multiplier?  It's also 5. What is the tax multiplier? It's minus 4. What is the balanced-budget multiplier? It's 1 (and it's always 1 no matter what the value of b).

2. Write the specific savings equation that corresponds to the consumption equation. S = -100 + 0.2Yd

3. At what level of income (Y, not Yd) does savings equal zero? Y = 540.

4. How much is aggregate demand, or total spending, when income (Y) is 900?  Aggregate demand, or C + I + G, is 898 when Y is 900. Is the economy in equilibrium at this level of income? No. Y doesn't equal C + I + G..

5. What is the equilibrium level of income? Yeq = 890. Describe the economic process that brings about this Keynesian equilibrium. Bla bla bla bla bla.

6. Suppose that the government raises the level of government spending by 10. What does this do to the equilibrium level of income? It raises the equilibrium level of income by 50, from 890 to 940.

7. How much more government spending is required to achieve full employment? It would take another 5 to raises the equilibrium level of income to full employment, that is, to raise it by 25 (from 940 to 965).

8. What tax policy would drive the economy from the equilibrium level calculated in question #5 above to its full-employment level? Taxes would have to be cut by 18.75 to drive the equilibrium level of income up by 75 (from 890 to 965).

9. What fiscal policy (involving changes in both G and T) would restore full employment  without getting the government's budget any further out of balance? (Again, start with  the equilibrium level of income calculated in question #5.) Both government spending and taxes would have to be increased by 75.